Item 1: Financial Statements
Chicken Soup for the Soul Entertainment,
Inc.
Condensed Consolidated Balance Sheets
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,076,573
|
|
|
$
|
507,247
|
|
Accounts receivable, net
|
|
|
1,180,173
|
|
|
|
151,417
|
|
Prepaid expenses
|
|
|
1,410,357
|
|
|
|
216,397
|
|
Intangible asset - video content license
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
Prepaid distribution fees
|
|
|
2,062,852
|
|
|
|
592,786
|
|
Due from affiliated companies
|
|
|
5,043,973
|
|
|
|
1,372,517
|
|
Programming costs, net
|
|
|
8,599,082
|
|
|
|
3,977,553
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
33,373,010
|
|
|
$
|
11,817,917
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior secured notes payable, net of unamortized debt discount of $0 and $318,992, respectively, and unamortized deferred financing costs of $0 and $40,902, respectively
|
|
$
|
-
|
|
|
$
|
2,610,106
|
|
Senior secured notes payable under revolving line of credit to related party, net of unamortized debt discount of $0 and $160,667, respectively, and unamortized deferred financing costs of $0 and $2,845, respectively
|
|
|
-
|
|
|
|
3,316,488
|
|
Accounts payable and accrued expenses
|
|
|
566,883
|
|
|
|
694,368
|
|
Income taxes payable
|
|
|
99,000
|
|
|
|
-
|
|
Accrued programming costs
|
|
|
1,562,520
|
|
|
|
1,061,980
|
|
Deferred tax liability, net
|
|
|
201,000
|
|
|
|
439,000
|
|
Deferred revenue
|
|
|
1,052,500
|
|
|
|
71,429
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,481,903
|
|
|
|
8,193,371
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $.0001 par value, 10,000,000 shares authorized; none issued or outstanding
|
|
|
-
|
|
|
|
-
|
|
Class A common stock, $.0001 par value, 70,000,000 shares authorized; 3,497,133 and 893,369 shares, issued and outstanding, respectively
|
|
|
350
|
|
|
|
89
|
|
Class B common stock, $.0001 par value, 20,000,000 shares authorized; 8,071,955 shares issued and outstanding
|
|
|
807
|
|
|
|
807
|
|
Additional paid-in capital
|
|
|
31,696,017
|
|
|
|
4,074,646
|
|
Accumulated deficit
|
|
|
(1,806,067
|
)
|
|
|
(450,996
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity
|
|
|
29,891,107
|
|
|
|
3,624,546
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
33,373,010
|
|
|
$
|
11,817,917
|
|
See accompanying notes to unaudited condensed
consolidated financial statements
Chicken Soup for the Soul Entertainment,
Inc.
Condensed Consolidated Statements
of Operations
(unaudited)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Television
|
|
$
|
-
|
|
|
$
|
136,364
|
|
|
$
|
1,859,536
|
|
|
$
|
2,204,546
|
|
Online
|
|
|
48,466
|
|
|
|
-
|
|
|
|
398,745
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
48,466
|
|
|
|
136,364
|
|
|
|
2,258,281
|
|
|
|
2,404,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
-
|
|
|
|
61,500
|
|
|
|
794,923
|
|
|
|
1,088,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
48,466
|
|
|
|
74,864
|
|
|
|
1,463,358
|
|
|
|
1,315,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative (including $182,581 and
$1,436,293 of non-cash share-based compensation expense for the three months ended September 30, 2017 and 2016,
respectively, and $474,772 and $1,513,311 of non-cash share-based compensation expense for the nine months
ended September 30, 2017 and 2016, respectively)
|
|
|
690,676
|
|
|
|
1,793,963
|
|
|
|
1,505,589
|
|
|
|
2,214,036
|
|
Management and license fees
|
|
|
4,846
|
|
|
|
13,636
|
|
|
|
225,828
|
|
|
|
240,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
695,522
|
|
|
|
1,807,599
|
|
|
|
1,731,417
|
|
|
|
2,454,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(647,056
|
)
|
|
|
(1,732,735
|
)
|
|
|
(268,059
|
)
|
|
|
(1,138,671
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2,559
|
|
|
|
4
|
|
|
|
2,568
|
|
|
|
11
|
|
Interest expense
|
|
|
(124,142
|
)
|
|
|
(210,816
|
)
|
|
|
(1,176,580
|
)
|
|
|
(256,395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(768,639
|
)
|
|
|
(1,943,547
|
)
|
|
|
(1,442,071
|
)
|
|
|
(1,395,055
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit from income taxes
|
|
|
(246,000
|
)
|
|
|
(857,000
|
)
|
|
|
(87,000
|
)
|
|
|
(587,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(522,639
|
)
|
|
$
|
(1,086,547
|
)
|
|
$
|
(1,355,071
|
)
|
|
$
|
(808,055
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per common share
|
|
$
|
(0.05
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss per common share
|
|
$
|
(0.05
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding
|
|
|
10,411,142
|
|
|
|
8,869,658
|
|
|
|
9,549,413
|
|
|
|
8,796,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding
|
|
|
10,411,142
|
|
|
|
8,869,658
|
|
|
|
9,549,413
|
|
|
|
8,796,847
|
|
See accompanying notes to unaudited
condensed consolidated financial statements.
Chicken Soup for the Soul
Entertainment, Inc
Condensed Consolidated Statements
of Cash Flows
(unaudited)
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Cash flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,355,071
|
)
|
|
$
|
(808,055
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
474,772
|
|
|
|
1,513,311
|
|
Amortization of programming costs
|
|
|
794,923
|
|
|
|
1,088,727
|
|
Amortization of deferred financing costs
|
|
|
43,747
|
|
|
|
19,883
|
|
Amortization of debt discount
|
|
|
865,833
|
|
|
|
173,276
|
|
Loss on debt extinguishment
|
|
|
24,803
|
|
|
|
-
|
|
Deferred income taxes
|
|
|
(238,000
|
)
|
|
|
(587,000
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
(1,028,755
|
)
|
|
|
(799,540
|
)
|
Prepaid expenses and other current assets
|
|
|
(1,193,960
|
)
|
|
|
(172,504
|
)
|
Programming costs
|
|
|
(4,294,511
|
)
|
|
|
(4,087,536
|
)
|
Prepaid distribution fees
|
|
|
(1,470,066
|
)
|
|
|
-
|
|
Accounts payable and accrued expenses
|
|
|
(297,948
|
)
|
|
|
272,836
|
|
Income taxes payable
|
|
|
99,000
|
|
|
|
-
|
|
Deferred revenues
|
|
|
981,072
|
|
|
|
2,521,510
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(6,594,161
|
)
|
|
|
(865,092
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of video content license from affiliate
|
|
|
-
|
|
|
|
(5,000,000
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
-
|
|
|
|
(5,000,000
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from revolving credit facility
|
|
|
3,325,000
|
|
|
|
3,850,000
|
|
Repayments of revolving credit facility
|
|
|
(6,805,000
|
)
|
|
|
(1,050,000
|
)
|
Payment of deferred financing cost
|
|
|
-
|
|
|
|
(6,400
|
)
|
Due from affiliated companies
|
|
|
(3,671,456
|
)
|
|
|
802,699
|
|
Proceeds from notes payable
|
|
|
2,030,000
|
|
|
|
2,480,000
|
|
Repayments of notes payable
|
|
|
(4,082,000
|
)
|
|
|
-
|
|
Proceeds from issuance of common stock in IPO, net
|
|
|
23,953,543
|
|
|
|
-
|
|
Proceeds from issuance of common stock in private placements
|
|
|
1,413,400
|
|
|
|
900,760
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
16,163,487
|
|
|
|
6,977,059
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
9,569,326
|
|
|
|
1,111,967
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
507,247
|
|
|
|
4,078
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the period
|
|
$
|
10,076,573
|
|
|
$
|
1,116,045
|
|
|
|
|
|
|
|
|
|
|
Supplemental data:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
289,634
|
|
|
$
|
45,306
|
|
Income taxes paid
|
|
$
|
52,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-cash operating activity
|
|
|
|
|
|
|
|
|
Fair value of shares issued to executive producer
|
|
$
|
625,500
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activities
|
|
|
|
|
|
|
|
|
Fair value of warrants issued with revolving credit facility and term notes
|
|
$
|
415,476
|
|
|
$
|
720,266
|
|
Fair value of shares issued for Trema rights
|
|
$
|
-
|
|
|
$
|
792,000
|
|
Conversion of senior secured notes payable to Class A common stock
|
|
$
|
918,000
|
|
|
$
|
-
|
|
See accompanying notes to the unaudited
condensed consolidated financial statements.
Chicken Soup for the Soul
Entertainment, Inc.
Notes to Condensed Consolidated
Financial Statements
(unaudited)
Note 1 – The Company, Description of Business, Initial
Public Offering and Acquisition
Chicken Soup for the Soul Entertainment,
Inc. (the “Company”) is a Delaware corporation formed on May 4, 2016. CSS Productions, LLC (“CSS Productions”),
the Company’s predecessor and immediate parent company, was formed in December 2014 by Chicken Soup for the Soul, LLC (“CSS”),
a publishing and consumer products company, and initiated operations in January 2015. The Company was formed to create a discrete
entity focused on video content opportunities using the
Chicken Soup for the Soul
brand (the “Brand”). The Brand
is owned and licensed to the Company by CSS. Chicken Soup for the Soul Holdings, LLC (“CSS Holdings”), is the parent
company of CSS and the Company’s ultimate parent company.
The Company creates and distributes
video content under the Brand. The Company has an exclusive, perpetual and worldwide license from CSS to create and distribute
video content under the Brand.
In May 2016, pursuant to the
terms of the contribution agreement among CSS, CSS Productions and the Company (the “CSS Contribution Agreement”),
all video content assets (the “Subject Assets”) owned by CSS, CSS Productions and their CSS subsidiaries were transferred
to the Company in consideration for its issuance to CSS Productions of 8,600,568 shares of the Company’s Class B common stock.
Since the date of the CSS Contribution Agreement, CSS Productions has transferred certain of these shares of Class B common stock
to third parties in certain transactions. Concurrently with the consummation of the CSS Contribution Agreement, certain rights
to receive payments under certain agreements comprising part of the Subject Assets owned by Trema, LLC (“Trema”), a
company principally owned and controlled by William J. Rouhana, Jr., the Company’s chairman and chief executive officer,
were assigned to the Company under a contribution agreement (the “Trema Contribution Agreement”) in consideration for
the Company’s issuance to Trema of 159,432 shares or our Class B common stock.
Thereafter, CSS Productions’
operating activities substantially ceased and the Company continued the business operations of producing and distributing the video
content.
The Company is an “emerging
growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS
Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the
JOBS Act until such time as those standards apply to private companies. The Company has irrevocably elected to avail itself of
this exemption from new or revised accounting standards, and, therefore, will not be subject to the same new or revised accounting
standards as public companies that are not emerging growth companies.
The Company operates in one
reportable segment, the production and distribution of video content, and currently operates solely in the United States. The Company
has entered into a distribution agreement with a company located in the United States that provides for the distribution of an
episodic television series in Europe. The Company intends to do business internationally.
Initial Public Offering
of Class A Common Stock
On August 17, 2017, the Company
completed its Initial Public Offering (“IPO”) of $30.0 million consisting of 2,500,000 shares of Class A common stock
(“Class A Shares”) at an offering price of $12.00 per share. The Class A Shares offered and sold in the IPO were comprised
of (a) an aggregate of 2,241,983 newly issued Class A Shares and (b) an aggregate of 258,017 issued and outstanding Class A Shares
that were sold by certain non-management, non-affiliated existing stockholders (“Selling Stockholder Shares”). The
Company did not receive any of the proceeds from the sale of Selling Stockholder Shares.
In connection with the consummation
of the IPO, the Class A Shares were approved for listing on the Nasdaq Global Market under the symbol “CSSE”.
The IPO resulted in gross
cash proceeds to the Company of approximately $26.9 million and $24.0 million of net cash proceeds, after deducting
cash selling agent discounts, commissions and offering expenses. The net proceeds were used to fully repay $4.1 million of
senior secured notes payable and $4.5 million of senior secured notes payable under the revolving line of credit (see Note
9). The remaining proceeds will be used for general corporate purposes including working capital, acquisition of video
content and strategic transactions.
Chicken Soup for the Soul Entertainment,
Inc.
Notes to Condensed Consolidated
Financial Statements
(unaudited)
Acquisition of Screen
Media
As described more
fully in Note 14, on November 3, 2017, the Company acquired all of the membership interests of Screen Media Ventures, LLC
(“Screen Media”) for approximately $4.9 million in cash and the issuance of 35,000 shares of the Company’s
Class A common stock and Class Z warrants of the Company exercisable into 50,000 shares of the Company’s Class A common
stock at $12 per share. Screen Media operates Popcornflix®, one of the largest advertiser-supported direct-to-consumer
online video services (“AVOD”) and distributes television series and films worldwide.
Note 2 – Summary of
Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United
States (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission regarding interim financial
reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP
have been condensed or omitted pursuant to such rules and regulations. As such, the information included in this quarterly report
on Form 10-Q should be read in conjunction with the audited consolidated financial statements and accompanying notes included in
the Company’s report on Form 1-A POS for the year ended December 31, 2016.
The condensed consolidated balance
sheet as of December 31, 2016 included herein was derived from the audited financial statements as of that date, but does not include
all disclosures, including notes, required by GAAP.
The unaudited condensed consolidated
interim financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company accounts
and transactions have been eliminated in consolidation.
In the opinion of management,
the accompanying unaudited interim condensed consolidated financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position of the Company at September 30, 2017, and the results
of its operations for the three month and nine month periods ended September 30, 2017 and 2016. The results of operations of any
interim period are not necessarily indicative of the results of operations to be expected for the full fiscal year. These condensed
consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying
notes included in the Company’s report on Form 1-A POS for the years ended December 31, 2016 and 2015.
Use of Estimates
The preparation of
financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expense during the reporting periods. The Company’s significant estimates
include those related to revenue recognition, accounts receivable allowances, intangible assets, share-based compensation
expense, income taxes and amortization of programming costs. Actual results could differ from those estimates.
Cash
and Cash Equivalents
Cash and cash equivalents include
highly liquid investments with original maturities of three months or less and consist primarily of money market funds. Such investments
are stated at cost, which approximates fair value.
Fair Value
Fair value is defined as the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. To increase the comparability of fair value measurements, a three-tier fair value hierarchy, which prioritizes
the inputs used in the valuation methodologies, is as follows:
Level 1—Valuations based
on quoted prices for identical assets and liabilities in active markets.
Level 2—Valuations based
on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in
active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that
are observable or can be corroborated by observable market data.
Level 3—Valuations based
on unobservable inputs reflecting our own assumptions. These valuations require significant judgment and estimates.
Chicken Soup for the Soul Entertainment,
Inc.
Notes to Condensed Consolidated
Financial Statements
(unaudited)
At September
30, 2017 and December 31, 2016, the fair value of the Company’s financial instruments including cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses and accrued programming costs, approximated their carrying value due
to the short-term nature of these instruments.
Accounts Receivable
Accounts receivable are stated
at the amounts management expects to collect. An allowance for doubtful accounts is recorded based on a combination of historical
experience, aging analysis and information on specific accounts. Account balances are written off against the allowance after all
means of collections have been exhausted and the potential for recovery is considered remote. Accounts are considered past due
or delinquent based on contractual terms and how recently payments have been received. At September 30, 2017 and December 31, 2016,
an allowance for uncollectible accounts was not considered necessary.
Programming Costs
Programming costs include the
unamortized costs of completed, in-process, or in-development long-form and short-form video content. For video content, the Company’s
capitalized costs include all direct production and financing costs, capitalized interest when applicable, and production overhead.
The costs of producing video
content are amortized using the individual-film-forecast method. These costs are amortized in the proportion that current period’s
revenue bears to management’s estimate of ultimate revenue expected to be recognized from each production.
For an episodic television series,
the period over which ultimate revenue is estimated cannot exceed ten years following the date of delivery of the first episode,
or, if still in production, five years from the date of delivery of the most recent episode, if later.
Programming costs are stated
at the lower of amortized cost or estimated fair value. The valuation of programming costs is reviewed on a title-by-title basis,
when an event or change in circumstances indicates that the fair value may be less than its unamortized cost and the valuation
is based on a discounted cash flows (“DCF”) methodology with assumptions for cash flows. Key inputs employed in the
DCF methodology include estimates of a program’s ultimate revenue and costs as well as a discount rate. The discount rate
utilized in the DCF is based on the weighted average cost of capital of the Company plus a risk premium representing the risk associated
with producing a particular program. The Company performs an annual impairment analysis for unamortized programming costs. An impairment
charge is recorded in the amount by which the unamortized costs exceed the estimated fair value. Estimates of future revenue involve
measurement uncertainties and it is therefore possible that reductions in the carrying value of programming costs may be required
as a consequence of changes in management’s future revenue estimates.
Included in cost of revenue
in the condensed consolidated statements of operations for the three months ended September 30, 2017 and 2016 is amortization of
programming costs totaling $0 and $61,500, respectively, and for the nine months ended September 30, 2017 and 2016 is amortization
of programming costs totaling $794,923 and $1,088,727, respectively. There was no impairment charge recorded in the three and nine
month periods ended September 30, 2017 and 2016.
Income Taxes
The Company was formed on May
4, 2016 as a Sub-Chapter C corporation for federal and state tax purposes. As such, the Company filed its first tax return for
the year ended December 31, 2016. CSS Productions has elected to be treated as a partnership for federal and state income tax purposes
and, accordingly, no provision is made for income taxes for the taxable income included in the Company’s condensed consolidated
results of operations. CSS Productions has not been audited by the taxing authorities since its formation. If taxable income is
adjusted as a result of an audit, then CSS Productions may be required to make distributions to satisfy its members’ tax
obligations. Any such distributions would not be made from, or be the responsibility of, the Company.
The Company records income taxes
under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable
to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred taxes are also recognized for operating losses that are available to offset future taxable income. A valuation allowance
is established, when necessary, to reduce deferred tax assets to the amount expected to be realized. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Chicken Soup for the Soul Entertainment,
Inc.
Notes to Condensed Consolidated
Financial Statements
(unaudited)
The Company accounts for uncertain
tax positions in accordance with the authoritative guidance issued by the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) Topic 740:
Income Taxes
, which addresses the determination of whether
tax benefits claimed or expected to be claimed on a tax return, should be recorded in the financial statements. Pursuant to the
authoritative guidance, the Company may recognize the tax benefit from an uncertain tax position only if it meets the “more
likely than not” threshold that the position will be sustained on examination by the taxing authority, based on the technical
merits of the position or expiration of statutes. The tax benefits recognized in the financial statements from such a position
should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate
settlement. In addition, the authoritative guidance addresses de-recognition, classification, interest and penalties on income
taxes, accounting in interim periods, and also requires increased disclosures.
The Company includes interest
and penalties related to its uncertain tax positions as part of income tax expense within its condensed consolidated statements
of operations. At September 30, 2017 and December 31, 2016, the Company did not have any unrecognized tax benefits or liabilities.
See Note 11 for additional information.
Long-Lived Assets
The Company reviews its long-lived
assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.
If the sum of the expected future cash flows, undiscounted and without interest, is less than the carrying amount of the asset,
an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value.
Revenue Recognition
The Company recognizes revenue
from the production and distribution of television programs and short-form video content in accordance with Accounting Standards
Codification Topic 926:
Entertainment – Films
(“ASC 926”) as amended. Revenue is recognized when persuasive
evidence of an arrangement exists, the fee is fixed and determinable, delivery has occurred, and collection of the resulting receivable
is deemed probable. For episodic television programs, revenue is recognized as each episode becomes available for delivery or becomes
available for broadcast, and for short-form online videos, revenue is recognized when the videos are posted to a website for viewing.
Revenue from the distribution of short-form online media content is included in online revenue in the accompanying consolidated
statements of operations.
Revenue generated under the
distribution agreement with A Sharp, Inc., d/b/a A Plus (“A Plus”) is reported on a net basis as the Company earns
a commission on the distribution of A Plus’ content (see Note 12).
Cash advances are recorded
as deferred revenue until all the conditions of revenue recognition have been met.
Share-Based Payments
The Company accounts for share-based
payments in accordance with ASC 718: Share-based compensation, which establishes the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. Under the provisions of the authoritative guidance, share-based compensation
expense is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite
service period, net of estimated forfeitures. Shares issued for services are based upon current selling prices of the Company’s
Class A common stock or independent valuations.
The
Company estimates the fair value of share-based instruments, options, etc., using the Black-Scholes option-pricing model. All
share-based awards were fulfilled with new shares of Class A common stock.
Advertising Costs
Advertising costs are expensed
as incurred. The Company did not incur any advertising costs in the three and nine month periods ended September 30, 2017 and 2016.
Earnings Per Share
Basic net earnings (loss)
per common share is computed based on the weighted average number of shares of all classes of common stock outstanding. Diluted
earnings per common share is computed based on the weighted average number of common shares outstanding increased, when applicable,
by dilutive common stock equivalents, comprised of Class W warrants, Class Z warrants and stock options outstanding.
Chicken Soup for the Soul Entertainment,
Inc.
Notes to Condensed Consolidated
Financial Statements
(unaudited)
Basic and diluted net earnings
or loss per common share assumes that Class B common stock of the Company issued pursuant to the Contribution Agreement and the
resulting recapitalization of the Company is issued and outstanding as of January 1, 2016.
In computing the effect of dilutive
common stock equivalents, the Company uses the treasury stock method to calculate the related incremental shares. In applying the
treasury stock method, the Company used a share price of $12 per share based on the price of its Class A common stock in its IPO.
Subsequent to the IPO, the actual share price was used. See Note 6.
Concentration of Credit
Risk
The Company maintains cash
balances at its bank. Accounts for each entity are insured by the Federal Deposit Insurance Corporation subject to certain limitations.
At various times during the fiscal year, the Company’s cash in bank balances exceeded the federally insured limits. The uninsured
balance at September 30, 2017 and December 31, 2016 was $9,576,544 and $5,600, respectively.
Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of cash in bank, revenue and accounts receivable. Concentrations
of credit risk with respect to accounts receivable and revenue are significant due to the small number of customers comprising
the Company’s customer base.
For the nine months ended September
30, 2017, we had 3 customers, which accounted for 90% of our total revenue (the largest of which accounted for 73%). For the nine
months ended September 30, 2017, the Company had 3 customers that accounted for 98% of accounts receivable (the largest of which
accounted for 79%). As of December 31, 2016, the Company had one customer that accounted for all accounts receivable.
Note 3 – Recent Accounting
Pronouncements
In May 2017, the FASB
issued Accounting Standards Update (“ASU”) 2017-09,
Compensation – Stock Compensation Topic 718: Scope
of Modification Accounting
, which clarifies when changes to the terms or conditions of a share-based payment award must
be accounted for as a modification. ASU 2017-09 is intended to reduce diversity in practice and result in fewer changes to
the terms of an award being accounted for as a modification. Under this guidance, an entity will not apply modification
accounting to a share-based payment award if the award’s fair value, vesting conditions and balance sheet
classification remain the same before and after the change. ASU 2017-09 is effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2017 for all entities. Early adoption is permitted. The Company is
evaluating the impact of this guidance on its consolidated financial statements and does not expect it to have a significant
impact.
In January 2017, the FASB issued
ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
, which amends the guidance of FASB
ASC Topic 805, Business Combinations (ASC 805) adding guidance to assist entities with evaluating whether transactions should be
accounted for as acquisitions (disposals) of assets or businesses. The objective of ASU 2017-01 is to narrow the definition of
what qualifies as a business under Topic 805 and to provide guidance for streamlining the analysis required to assess whether a
transaction involves the acquisition (disposal) of a business. ASU 2017-01 provides a screen to assess when a set of assets and
processes do not qualify as a business under Topic 805, reducing the number of transactions that need to be considered as possible
business acquisitions. ASU 2017-01 also narrows the definition of output under Topic 805 to make it consistent with the description
of outputs under Topic 606. The guidance of ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, including
interim periods within those fiscal years and early adoption is permitted under certain circumstances. The Company is evaluating
the impact of this guidance on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, which amended the
guidance of FASB ASC Topic 230, Statement of Cash Flows (ASC 230) on the classification of certain cash receipts and payments.
The primary purpose of ASU 2016-15 is to reduce the diversity in practice which has resulted from a lack of consistent principles
on this topic. The amendments of ASU 2016-15 add or clarify guidance on eight specific cash flow issues, including debt prepayment
or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business
combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies,
distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable
cash flows and application of the predominance principle.
Chicken Soup for the Soul Entertainment,
Inc.
Notes to Condensed Consolidated
Financial Statements
(unaudited)
The guidance of ASU 2016-15
is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company
is evaluating the impact of this guidance on its consolidated financial statements.
In May 2014, the FASB issued
Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU
2014-09”). ASU 2014-09 removes inconsistencies and differences in existing revenue requirements between GAAP and International
Financial Reporting Standards (“IFRS”) and requires a company to recognize revenue when it transfers promised goods
or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for
those goods or services. Once effective, ASU 2014-09 can be applied retrospectively to each prior reporting period presented or
retrospectively with the cumulative effect of initial adoption recognized at the date of initial application.
In March 2016, the FASB issued
ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue
Gross versus Net)” (“ASU 2016-08”). The amendments in ASU 2016-08 clarify the implementation guidance on principal
versus agent considerations. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606):
Identifying Performance Obligations and Licensing” (“ASU 2016-10”). The amendments in ASU 2016-10 clarify aspects
relating to the identification of performance obligations and improve the operability and understandability of the licensing implementation
guidance.
In May 2016, the FASB issued ASU
2016-12, “Update 2016-12—Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and
Practical Expedients” (“ASU 2016-12”). In December 2016, the FASB issued ASU 2016-20, “Technical
Corrections and Improvements to Topic 606, Revenue from Contracts with Customers (“ASU 2016-20). The amendments in ASU
2016-12 address certain issues identified on assessing collectability, presentation of sales taxes, noncash consideration,
and completed contracts and contract modifications at transition.
The effective date for all ASUs with respect
to Topic 606 noted above for public companies is annual and interim reporting periods beginning after December 15, 2017. The Company
is currently evaluating the impact these ASUs will have on its consolidated financial statements.
In January 2016, the FASB issued
ASU 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and
Financial Liabilities” (“ASU 2016-01”). The amendments in ASU 2016-01 address certain aspects of recognition,
measurement, presentation and disclosure of financial instruments. ASU 2016-01 is effective for the Company for annual and interim
reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact ASU 2016-01 will have on its
consolidated financial statements.
In February 2016, the FASB issued
ASU 2016-02, “Leases” (Topic 842) (“ASU 2016-02”). The amendments in ASU 2016-02 address certain aspects
in lease accounting, with the most significant impact for lessees. The amendments in ASU 2016-02 require lessees to recognize all
leases on the balance sheet by recording a right-of-use asset and a lease liability, and lessor accounting has been updated to
align with the new requirements for lessees. The new standard also provides changes to the existing sale-leaseback guidance. ASU
2016-02 is effective for the Company for annual and interim reporting periods beginning after December 15, 2019. The Company is
currently evaluating the impact ASU 2016-02 will have on its consolidated financial statements.
In March 2016, the FASB issued ASU
2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting” (“ASU 2016-09”). The amendments in ASU 2016-09 address several aspects of the accounting for
share-based payment transactions, including the income tax consequences, classification of awards as either equity or
liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for the Company for annual and
interim reporting periods beginning after December 15, 2017. The Company does not anticipate any material impact of ASU
2016-09 on its consolidated financial statements.
Chicken Soup for the Soul Entertainment,
Inc.
Notes to Condensed Consolidated
Financial Statements
(unaudited)
Note 4 – Episodic Television Programs
(a)
In September
2014, CSS and a charitable foundation (the “Foundation”), on whose advisory board the Company’s chief executive
officer sits, entered into an agreement under which the Foundation agreed to sponsor a Saturday morning family television show,
Chicken Soup for the Soul’s Hidden Heroes (“Hidden Heroes”)
, a half-hour hidden-camera family friendly
show that premiered on the CBS Television Network (“CBS”). The Foundation is a not-for-profit charity that promotes
tolerance, compassion and respect.
The Foundation has funded two
seasons of the show that aired on CBS and has agreed to fund
Hidden Heroes
for a third season.
(b)
In September
2015, CSS Productions received corporate sponsorship funding from a company (the “Sponsor”), to develop the Company’s
second episodic television series entitled
Project Dad, a Chicken Soup for the Soul Original
(“
Project Dad
”).
Project Dad
presents three busy celebrity dads as they put their careers on the “sidelines” and get to know
their children like never before.
The
Project Dad
slate
was comprised of eight, one-hour episodes that aired weekly on Discovery Communications, LLC’s Discovery Life network in
November and December 2016. In addition, in January 2017,
Project Dad
began airing on Discovery Communications, LLC’s
TLC network. The Sponsor has agreed to fund a new parenting series.
In accordance with ASC 926 as
amended, the Company has recognized revenue for the
Hidden Heroes
and
Project Dad
series as the episodes became available
for delivery and broadcast.
(c)
On June 20,
2017, the Company entered into an agreement with HomeAway.com to receive corporate sponsorship funding for an episodic television
series entitled
Vacation Rental Potential.
This series will give viewers the information and inspiration needed to realize
their dreams of using real estate entrepreneurship to obtain financial success.
Note 5 –
Share-Based Compensation
Effective January 1, 2017, the
Company adopted the 2017 Long Term Incentive Plan (the “Plan”) to attract and retain certain employees. The Plan provides
for the issuance of up to one million common stock equivalents subject to the terms and conditions of the Plan. The Plan generally
provides for quarterly and bi-annual vesting over terms ranging from two to three years. The Company accounts for the Plan as an
equity plan.
The Company recognized these
stock options at fair value determined by applying the Black Scholes options pricing model to the grant date market value of the
underlying common shares of the Company. The compensation expense associated with these stock options is amortized on a straight-line
basis over their respective vesting periods. For the three and nine months ended September 30, 2017, respectively, the Company
recognized $142,043 and $394,238 of non-cash share-based compensation expense in selling, general and administrative expense in
the condensed consolidated statements of operations. As of September 30, 2017, the Company had unrecognized pre-tax compensation
expense of $1,099,692 related to non-vested stock options under the Plan. There were 145,001 stock options vested at September
30, 2017.
Chicken Soup for the Soul Entertainment,
Inc.
Notes to Condensed Consolidated Financial
Statements
(unaudited)
Stock options activity as of
September 30, 2017 is as follows:
|
|
As of September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Number of Stock
Options
|
|
|
Weighted Average
Grant Date Fair
Value
|
|
|
|
|
|
|
|
|
Total outstanding at the beginning of the period
|
|
|
-
|
|
|
$
|
-
|
|
Options granted
|
|
|
515,000
|
|
|
|
2.90
|
|
Options exercised
|
|
|
-
|
|
|
|
-
|
|
Actual options forfeited
|
|
|
-
|
|
|
|
-
|
|
Options expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total outstanding at the end of the period
|
|
|
515,000
|
|
|
$
|
2.90
|
|
Assumptions used in calculating
the fair value of the stock options granted during 2017 are summarized below:
|
|
Weighted
Average as of
September 30,
2017
|
|
Valuation assumptions:
|
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0%
|
|
Expected equity volatility
|
|
|
57%
|
|
Expected term (years)
|
|
|
2 - 3
|
|
Risk-free interest rate
|
|
|
1.73% - 1.94%
|
|
Exercise price per stock option
|
|
$
|
6.50 - 9.74
|
|
Market price per share
|
|
$
|
5.78 - 9.74
|
|
Weighted average fair value per stock option
|
|
$
|
2.90
|
|
The Company also awards common
stock grants to directors and non-employee executive producers that provide services to the Company.
For the three months ended September
30, 2017 and 2016, the Company recognized in selling, general and administrative expense, non-cash share-based compensation expense
of $40,539 and $1,436,293, respectively and for the nine months ended September 30, 2017 and 2016, the Company recognized non-cash
share-based compensation expense of $80,534 and $1,513,311 respectively. Included in non-cash share-based compensation expense
for the three and nine month periods ended September 30, 2016, is the fair value of share-based awards that were issued to a former
officer of the Company. The fair value of the former officer’s shares was determined to be $1,436,294 based on an independent
valuation.
Additionally, for the nine months
ended September 30, 2017, the Company capitalized as programming costs, the fair value of Class A common stock and Class Z warrants
totaling $625,500 issued to a non-employee executive producer of two television shows to be produced, based on an independent valuation
of such shares and warrants. The programming costs will be amortized to cost of revenue as the television shows become available
for delivery in accordance with Company accounting policy.
Chicken Soup for the Soul
Entertainment, Inc.
Notes to Condensed Consolidated
Financial Statements
(unaudited)
Note 6 – Earnings Per Share
A reconciliation of shares used in calculating basic
and diluted per share data is as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average shares outstanding
|
|
|
10,411,412
|
|
|
|
8,869,658
|
|
|
|
9,549,413
|
|
|
|
8,796,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed issuance of shares from exercise of stock options (a)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Assumed issuance of shares from exercise of warrants (a)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average shares outstanding
|
|
|
10,411,412
|
|
|
|
8,869,658
|
|
|
|
9,549,413
|
|
|
|
8,796,847
|
|
(a) The additional shares from the exercise of stock options
and warrants for the three and nine month periods ended September 30, 2017 and 2016 are anti-dilutive in nature, and as a result
are excluded from the determination of diluted weighted-average shares outstanding.
Note 7 – Programming Costs
Programming
costs, net of amortization, consists of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Released, net of accumulated amortization of $4,546,886
and $3,801,963, respectively
|
|
$
|
3,718,352
|
|
|
$
|
3,228,440
|
|
|
|
|
|
|
|
|
|
|
In production
|
|
|
3,501,415
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
In development
|
|
|
1,379,315
|
|
|
|
649,113
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,599,082
|
|
|
$
|
3,977,553
|
|
Note 8 – Intangible Asset - Video Content License
The Company has been granted a perpetual,
exclusive license from CSS to utilize the Brand and related content, for visual exploitation on a worldwide basis (“Perpetual
License”). In granting the Perpetual License, CSS required an initial purchase price of $5,000,000, which approximated its
costs to CSS, and was paid by the Company during 2016. The Company has recorded the initial purchase price of the Perpetual License
at the estimated cost to CSS in its consolidated balance sheets.
Note 9 – Senior Secured Notes Payable and
Senior Secured Revolving Line of Credit
Senior Secured Notes Payable
From July 2016 through May 2017,
the Company sold in a private placement (“Debt Private Placement”) $5,000,000 aggregate principal amount of 5% senior
secured term notes (the “Term Notes”) and Class W warrants to purchase an aggregate of 460,000 shares of Class A common
stock at $7.50 per share (the “Warrants”).
In June 2017, at the election
of certain Noteholders, the Company converted $918,000 of Term Notes into 102,060 Class A common shares at a conversion price per
share of $9 and issued Class Z warrants to purchase an aggregate of 30,618 shares of Class A common stock at $12 per share, to
those Noteholders that elected to convert.
The Term Notes ranked
pari
passu
with the Senior Secured Revolving Line of Credit described below (“Credit Facility”) and senior to any existing
or future indebtedness of the Company. The Term Notes were secured by a first priority security interest and lien on all tangible
and intangible assets of the Company, and was subject to an intercreditor agreement with respect to the Credit Facility.
Chicken Soup for the Soul
Entertainment, Inc.
Notes to Condensed Consolidated
Financial Statements
(unaudited)
The Term Notes were repaid in full on August 18,
2017 from the proceeds of the IPO.
The Term Notes and the Warrants
were accounted for in accordance with ASC 470:
Debt
which provides, among other things, that the fair value is allocated
between the debt and the related warrants. The Warrants are exercisable at any time prior to June 30, 2021 and are callable under
certain circumstances, but in no event prior to January 31, 2018.
The fair value of the Warrants
was determined to be $1,079,360 using the Black-Scholes option-pricing model and the relative fair value of the warrants was recorded
as a discount to the Term Notes with a corresponding credit to additional paid-in capital.
For the nine months ended September
30, 2017, amortization of the debt discount of $627,973, amortization of deferred financing costs of $40,902, and cash interest
expense paid on the Term Notes of $136,526 is included in interest expense in the accompanying condensed consolidated statement
of operations. For the nine months ended September 30, 2016, amortization of the debt discount of $85,768, amortization of deferred
financing costs of $17,750 and cash interest expense paid on the Term Notes of $15,271 is included in interest expense in the accompanying
condensed consolidated statement of operations.
Officers of the Company and
of CSS, and their family members, participated in the Debt Private Placements on the same terms and conditions as other investors
(see Note 12).
Senior Secured Revolving
Line of Credit
On May 12, 2016, the Company
entered into the Credit Facility with an entity controlled by its chief executive officer (the “Lender”). Under the
amended terms of the Credit Facility, the Company can borrow up to an aggregate of $4,500,000 until June 30, 2018 (the “Maturity
Date”).
Advances made under the Credit
Facility are used for working capital and general corporate purposes, and were used in part, for payments in 2016 due to CSS pursuant
to the license agreement with the Company.
Borrowings under the Credit
Facility bear interest at 5% per annum and an annual fee equal to 0.75% of the unused portion of the Credit Facility, payable monthly
in arrears in cash.
If payment obligations under
the Credit Facility are still outstanding at the Maturity Date, or, if prior to the Maturity Date there is an event of default
as prescribed by the Credit Facility, then, at the option of the Company, (a) all principal and interest may be exchanged into
shares of Class A common stock of the Company on the same terms as the Company’s most recently completed equity financing,
provided, that under no circumstances shall the pre-money valuation used for this exchange be less than $52,560,000, (b) the Maturity
Date of the Credit Facility may be extended by mutual agreement of the parties, and (c) all principal and interest will be paid
in full. In connection with the Credit Facility, the Company issued Class W warrants to the Lender to purchase 157,500 shares of
the Company’s Class A common stock at an exercise price of $7.50 per share.
All Warrants issued to the Lender
expire on May 12, 2021 and are accounted for as equity warrants.
The Credit Facility and the
related warrants were accounted for in accordance with ASC 470, which provides, among other things, that the fair value is allocated
between the debt and the related warrants. The fair value of the warrants issued was determined to be $424,025 using the Black-Scholes
option-pricing model and the relative fair value of the warrants was recorded as a discount to the Credit Facility with a corresponding
credit to additional paid-in capital.
For the nine months ended September 30, 2017, amortization of
the debt discount of $237,860, amortization of deferred financing costs of $2,845 and cash interest expense paid on the Credit
Facility of $130,474 is included in interest expense in the accompanying condensed consolidated statement of operations. For the
nine months ended September 30, 2016, amortization of the debt discount of $87,508, amortization of deferred financing costs of
$2,133 and cash interest expense paid on the Credit Facility of $44,896 is included in interest expense in the accompanying condensed
consolidated statement of operations.
Chicken Soup for the Soul
Entertainment, Inc.
Notes to Condensed Consolidated
Financial Statements
(unaudited)
The balance outstanding under
the Credit Facility of $4.5 million was repaid in full on August 23, 2017 from the proceeds of the IPO. The Company can request
additional advances under the Credit Facility up to $4.5 million at any time until the Maturity Date.
Note 10
– Stockholders’ Equity
Equity
Structure
The Company is
authorized to issue 70,000,000 shares of Class A common stock, par value $0.0001 (“Class A Stock”), 20,000,000
shares of Class B common stock, par value $.0001 (“Class B Stock”), and 10,000,000 shares of preferred stock, par
value $.0001. As of September 30, 2017, and December 31, 2016, the Company had 3,497,133 and 893,369 shares of Class A Stock
outstanding, respectively and 8,071,955 shares of Class B Stock outstanding. There are no shares of preferred stock
outstanding.
Each holder
of Class A Stock is entitled to one vote per share while holders of Class B Stock are entitled to ten votes per share.
Recapitalization
As described
in Note 1, in May 2016, pursuant to the terms of the CSS Contribution Agreement, the Company issued 8,600,568 shares of the Company’s
Class B common stock as consideration paid for all video content assets owned by CSS, CSS Productions and their CSS subsidiaries.
CSS Productions transferred certain of these shares of Class B common stock to third parties.
Concurrently with
the consummation of the CSS Contribution Agreement, certain rights to receive payments under certain agreements comprising
part of the Subject Assets owned by Trema, LLC (“Trema”), a company principally owned and controlled by William
J. Rouhana, Jr., the Company’s chairman and chief executive officer, were assigned to the Company under a contribution
agreement (the “Trema Contribution Agreement”) in consideration for the Company’s issuance to Trema of
159,432 shares or our Class B common stock. The Company recorded $16 par value of common stock and $792,000 of additional
paid-in capital as of June 30, 2016.
Equity Private Placements
Between June 2016 and May 2017,
the Company sold Class A common stock in two private placements.
From June 2016 through November,
2016, the Company sold in a private placement (the “2016 Equity Private Placement”) a total of 17,096 units with aggregate
proceeds of $1,025,760, consisting of an aggregate of 170,960 shares of Class A common stock and Warrants to purchase an aggregate
of 51,288 shares of Class A common stock. The purchase price of each unit was $60 and each unit consisted of 10 shares of Class
A common stock and 3 Warrants exercisable at $7.50 each. The Warrants are exercisable at any time prior to June 30, 2021 and are
accounted for as equity warrants. The Warrants are callable under certain circumstances, but in no event prior to January 31, 2018.
From November 2016 and through
May 2017, the Company sold in a private placement (the “2017 Equity Private Placement”) a total of 15,011 units with
aggregate proceeds of $975,710 consisting of an aggregate of 150,112 shares of Class A common stock and Warrants to purchase an
aggregate of 45,034 shares of Class A common stock. The purchase price of each unit was $65 and each unit consisted of 10 shares
of Class A common stock and 3 Warrants exercisable at $7.50 each. The Warrants are exercisable at any time prior to June 30, 2021
and are accounted for as equity warrants. The Warrants are callable under certain circumstances, but in no event prior to January
31, 2018.
Family members of officers of
the Company and of CSS participated in the 2016 Equity Private Placement and the 2017 Equity Private Placement on the same terms
and conditions as other investors (see Note 12).
In two separate transactions,
other parties purchased a total of 55,000 shares of Class A common stock and Warrants to purchase an aggregate of 50,000 shares
of Class A common stock. Total proceeds to the Company were $487,500.
Chicken
Soup for the Soul Entertainment, Inc.
Notes to Condensed Consolidated
Financial Statements
(unaudited)
Executive
Producer Shares
As described
in Note 5, in June 2017 the Company issued 50,000 shares of Class A common stock and a Class Z warrant to purchase 50,000 shares
of Class A common stock at $12 per share to a non-employee executive producer of two television shows to be produced by the Company.
Based on an independent valuation of such shares and warrants, the fair value of this award using observable market input for the
Class A common stock issuance and a Black Scholes model for the warrant totaled $625,500.
Note 11
– Income Taxes
The Company’s
benefit from income taxes consists of federal and state taxes in amounts necessary to align the Company’s year-to-date tax
provision with the effective rate it expects to achieve for the full year.
For the nine
months ended September 30, 2017 and 2016, the Company recorded an income tax benefit of $87,000 and $587,000, respectively, consisting
of federal and state taxes currently payable and deferred. The effective tax rate for the nine months ended September 30, 2017
and 2016 was 6% and 42%, respectively.
For the nine
months ended September 30, 2017, the Company’s consolidated statement of operations included approximately $1.3 million of
charges (representing approximately 89% of the loss before taxes) that are permanent differences between financial reporting and
income tax reporting because they will never be deductible for tax purposes. The permanent differences consist principally of amortization
of debt discounts included in interest expense and the impact of incentive stock options issued under the Company’s Long-Term
Incentive Plan. These nondeductible charges had a significant impact on the effective tax rate resulting in a 36% rate difference
between the expected effective rate and the actual effective rate. For the nine months ended September 30, 2016, the Company’s
consolidated statement of operations included approximately $250,000 of charges that are permanent differences and similar in nature
to those of 2017.
In calculating the benefit from
income taxes for the nine months ended September 30, 2017 and 2016, management also provided for the effect of temporary differences.
Temporary differences are timing differences between book income versus taxable income due to items of revenue or expense that
are recognized in one period for taxes, but in a different period for financial reporting. The Company’s temporary differences
consist primarily of net programming costs being deductible for tax purposes in the period incurred as contrasted to the capitalization
and amortization for financial reporting purposes under the guidance of ASC 926 and the amortization for tax purposes only of an
intangible asset under Section 197 of the Internal Revenue Code.
Note 12
– Related Party Transactions
(a)
Affiliate Resources and Obligations
In May 2016, the Company entered
into agreements with CSS and affiliated companies that provide the Company with access to important assets and resources as described
below (the “2016 Agreements”). The 2016 Agreements include a management services agreement and a license agreement.
A summary of the 2016 Agreements is as follows:
Management
Services Agreement
The Company
is a party to a Management Services Agreement with CSS (the “Management Agreement”). Under the terms of the Management
Agreement, the Company is provided with the operational expertise of the CSS companies’ personnel, including its chief executive
officer.
Pursuant
to the Management Agreement, the Company also receives other services, including accounting, legal, marketing, management, data
access and back office systems, and requires CSS to provide office space and equipment usage.
Under the
terms of the Management Agreement, commencing with the fiscal quarter ended March 31, 2016, the Company paid a quarterly fee to
CSS equal to 5% of the gross revenue as reported under GAAP for each fiscal quarter.
Chicken Soup for the Soul
Entertainment, Inc.
Notes to Condensed Consolidated
Financial Statements
(unaudited)
Since the
completion of the IPO, the Company reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
and the quarterly fee is based on gross revenue as reported in the applicable public filing under the Exchange Act for each fiscal
quarter. For the three months ended September 30, 2017 and 2016, the Company recorded management fee expense of $2,423 and $6,818,
respectively, payable to CSS. For the nine months ended September 30, 2017 and 2016, the Company recorded management fee expense
of $112,914 and $120,227, respectively, payable to CSS.
Each quarterly
amount due shall be paid on or prior to the later of the 45
th
day after the end of such quarter, or the 10
th
day after the filing of the applicable Exchange Act report for such quarter. On August 21, 2017, the Company paid to CSS $739,422
in management fees that were owed for the years 2015 and 2016 and for the six months ended June 30, 2017.
In addition,
for any sponsorship that is arranged by CSS for the Company’s video content or that contains a multi-element transaction
for which the Company receives a portion of such revenue and CSS receives the remaining revenue (for example, a transaction that
relates to both video content and CSS’s printed products), the Company shall pay a sales commission to CSS equal to 20% of
the portion of such revenue earned. Each sales commission shall be paid within 30 days of the end of the month in which received.
If CSS actually collects the Company’s portion of such fee, CSS will remit the revenue due to the Company after deducting
the sales commission. There were no sales commissions earned or paid to CSS during the three and nine month periods ended September
30, 2017 and 2016.
The term
of the Management Agreement is five years, with automatic one-year renewals thereafter unless either party elects to terminate
by delivering written notice at least 90 days prior to the end of the then current term. The Management Agreement is terminable
earlier by either party by reason of certain prescribed and uncured defaults by the other party. The Management Agreement will
automatically terminate in the event of the Company’s bankruptcy or a bankruptcy of CSS or if the Company no longer has licensed
rights from CSS under the License Agreement described below.
License Agreement
The Company
is a party to a trademark and intellectual property license agreement with CSS (the “License Agreement”). Under the
terms of the License Agreement, the Company has been granted a perpetual, exclusive license to utilize the Brand and related content,
such as stories published in the
Chicken Soup for the Soul
books, for visual exploitation worldwide.
In consideration of the License
Agreement, in May 2016 the Company paid to CSS a one-time license fee of $5,000,000, comprised of a $1,500,000 cash payment and
the concurrent issuance to CSS of the CSS License Note, having a principal amount of $3,500,000 and bearing interest at 0.5% per
annum (the “Note”). The Note provided that it could be prepaid at any time in the discretion of the Company.
The Note was due on the earlier
of (a) five business days after the date of written demand by CSS and (b) the third business day following the closing date of
an initial public offering of the common stock of the Company. The Note was repaid in full by September 16, 2016. Included in interest
expense in the accompanying consolidated statement of operations for the three and nine month periods ended September 30, 2016
is $891 and $3,069 respectively, of interest paid to CSS while the Note was outstanding.
Under the terms of the License
Agreement, commencing with the fiscal quarter ended March 31, 2016, the Company also pays an incremental recurring license fee
to CSS equal to 4% of gross revenue as reported under GAAP for each fiscal quarter. Since the completion of the IPO, the Company
reports under the Exchange Act and the quarterly fee is based on gross revenue as reported in the applicable public filing under
the Exchange Act for each fiscal quarter. Each quarterly amount shall be paid on or prior to the later of the 45th day after the
end of such quarter, or the 10
th
day after the filing of the applicable Exchange Act report for such quarter. On August
21, 2017, the Company paid to CSS $572,172 in license fees that were owed for the years 2015 and 2016 and for the six months ended
June 30, 2017.
In addition,
CSS provides marketing support for the Company’s productions through its email distribution, blogs and other marketing and
public relations resources. Commencing with the fiscal quarter ended March 31, 2016, the Company shall pay a quarterly fee to CSS
equal to 1% of gross revenue as reported under GAAP for each fiscal quarter for such support. For the three months ended September
30, 2017 and 2016, the Company recorded license fee expense of $2,423 and $6,818, respectively, payable to CSS.
Chicken Soup for the Soul
Entertainment, Inc.
Notes to Condensed Consolidated
Financial Statements
(unaudited)
For the
nine months ended September 30, 2017 and 2016, the Company recorded license fee expense of $112,914 and $120,227, respectively,
payable to CSS.
(b)
Distribution Agreement
with A Plus
In September 2016, a wholly-owned
subsidiary of CSS acquired a majority of the issued and outstanding common stock of A Plus. A Plus develops and distributes high
quality, empathetic short-form videos and articles to millions of people worldwide. A Plus is a digital media company founded,
chaired, and partially owned by actor and investor Ashton Kutcher. Mr. Kutcher owns 23%, third parties own 2%, and the CSS subsidiary
owns 75% of A Plus.
In September 2016, the Company
entered into a distribution agreement with A Plus (the “A Plus Distribution Agreement”). The A Plus Distribution Agreement
has an initial term ending in September 2023.
Under the terms of the A Plus
Distribution Agreement, the Company has the exclusive worldwide rights to distribute all video content (in any and all formats)
and all editorial content (including articles, photos and still images) created, produced, edited or delivered by A Plus.
Under the terms of the A Plus
Distribution Agreement, the Company was obligated to pay A Plus an advance of $3,000,000 by March 31, 2017 (the “A Plus Advance”)
which was recorded as prepaid distribution fees in the consolidated balance sheets.
The Company is
entitled to retain a net distribution fee of 30% (40% while any portion of the A Plus Advance remains outstanding) of gross
revenue generated by the distribution of A Plus video content and 5% (15% while any portion of the A Plus Advance remains
outstanding) of gross revenue generated by the distribution of A Plus editorial content. The Company recoups the A Plus
Advance by retaining the portion of gross revenue otherwise payable by the Company to A Plus under the A Plus Distribution
Agreement and applying same to the recoupment of the A Plus Advance.
The Company will not pay A Plus
its portion of gross revenue until such time as the A Plus Advance has been recouped in full. At September 30, 2017 and December
31, 2016, prepaid distribution fees were $2,062,852 and $592,786, respectively.
Online revenue in the Company’s
condensed consolidated statement of operations for the three months and nine months ended September 30, 2017 includes $48,462 and
$398,741, respectively, of net distribution fees earned by the Company under the A Plus Distribution Agreement.
(c)
Debt Private Placement and Equity Private Placements
Officers of the Company and
of CSS, and their family members (“Related Parties”), made purchases under the Debt Private Placement, the 2016 Equity
Private Placement, and the 2017 Equity Private Placement on the same terms and conditions as offered to other investors.
Prior to the IPO, Related Parties
purchased $1,413,140 under the 2017 Equity Private Placement and $2,030,000 under the Debt Private Placement. As of September 30,
2016, Related Parties purchased $220,877 under the Debt Private Placement. As discussed in Note 1, a portion of the net proceeds
from the IPO were used to fully repay the Term Notes sold in the Debt Private Placement.
(d)
Consulting Agreement
CSS Productions
had a consulting agreement with Low Profile Films, Inc. (“Low Profile”). Low Profile provided executive production
services for the Company that included all activities necessary to establish and maintain relationships regarding CSS Productions
proposed feature length film, a possible talk show and, Low Profile was to oversee the production to facilitate the public viewing
or distribution of same. The owner of Low Profile is the son of the Company’s chairman and chief executive officer.
The Company’s
agreement with Alcon for a feature length film expired on July 15, 2016 and as a result, the Company and Low Profile mutually agreed
to terminate the executive production services agreement as of July 15, 2016. For the three months and nine months ended September
30, 2016, the Company paid Low Profile $5,000 and $35,000, respectively, for services provided, which are included in selling,
general and administrative expenses in the accompanying condensed consolidated statements of operations.
Chicken Soup for the Soul
Entertainment, Inc.
Notes to Condensed Consolidated
Financial Statements
(unaudited)
(e)
Sponsorship by
the Foundation
CSS and the Company have several
agreements with a charitable foundation (the “Foundation”), on whose advisory board the Company’s chief executive
officer sits, under which the Foundation agreed to sponsor a Saturday morning family television show as discussed in Note 4. As
of September 30, 2017, two seasons of original episodes of
Hidden Heroes
have aired. For the three months ended September
30, 2017 and 2016, the Company recognized revenue of $0 and $136,364, respectively, from this sponsorship. For the nine months
ended September 30, 2017 and 2016, the Company recognized $1,666,588 and $2,204,546, respectively, from this sponsorship.
Note 13 – Commitments and
Contingencies
In the normal course of business,
from time-to-time, the Company may become subject to claims in legal proceedings.
Legal proceedings are subject-to
inherent uncertainties, and an unfavorable outcome could include monetary damages, and in such event, could result in a material
adverse impact on the Company's business, financial position, results of operations, or cash flows.
The Company is not currently,
and has not been since inception, subject to any legal claims or actions. Further, the Company has no knowledge of any pending
legal actions and does not believe it is currently a party to any pending legal claims or actions.
Note 14 – Subsequent
Events
Acquisition of Screen
Media Ventures, LLC
On November 3, 2017, the
Company completed the acquisition of all of the membership interests of Screen Media for approximately $4.9 million in cash and
the issuance of 35,000 shares of the Company’s Class A common stock and Class Z warrants of the Company exercisable into
50,000 shares of the Company’s Class A common stock at $12 per share (the “Purchase”). The Company is in the
process of ascertaining the fair value of the Class A common stock and Class Z warrants issued in the Purchase through an independent
valuation. Screen Media operates Popcornflix®, one of the largest advertiser-supported direct-to-consumer online video services
(“AVOD”) and distributes television series and films worldwide. The Company estimates that total closing costs related
to the Purchase, including legal fees, accounting fees and investment advisory fees, will be approximately $2.1 million.
In accordance with ASC 805, “
Business
Combinations
”, the Company will account for the acquisition by applying the acquisition method of accounting. The acquisition
method of accounting requires, among other things, that the assets acquired and the liabilities assumed in a business combination
be measured at their fair values as of the closing date of the transaction.
The Company anticipates that the total
Purchase price will be less than the fair value of the net identifiable assets acquired. The Company is in the process of ascertaining
the respective fair values of the net identifiable assets through an independent valuation, and such information will be provided
on Form 8-K/A when filed.
The results of operations of
Screen Media will be included in the Company’s consolidated statements of operations as of the acquisition date. The acquisition
of Screen Media is expected to have a material positive impact on the Company’s consolidated financial position, results
of operations and cash flows.
Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion
and analysis of our consolidated financial condition and results of operations should be read in conjunction with the audited consolidated
financial statements and accompanying notes included in the Company’s report on Form 1-A POS as submitted to the Securities
and Exchange Commission (“SEC”) on August 8, 2017 (“Form 1-A POS”). Some of the information contained in this
discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, includes forward-looking statements involving
risks and uncertainties and should be read together with the "Risk Factors" section of our report on Form 1-A POS for
a discussion of important factors which could cause actual results to differ materially from the results described in or implied
by the forward-looking statements contained in the following discussion and analysis.
Forward-Looking Statements
This Quarterly Report contains forward-looking
statements. Forward-looking statements include, but are not limited to, statements regarding expectations, intentions and strategies
regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events
or circumstances, including any underlying assumptions, are forward-looking statements. The words “target,” “anticipate,”
“believe,” “continue,” “could,” “estimate,” “expect,” “intend,”
“may,” “might,” “plan,” “possible,” “potential,” “predicts,”
“project,” “should,” “would” and similar expressions may identify forward-looking statements,
but the absence of these words does not mean that a statement is not forward-looking. The forward-looking statements contained
in this Report are based on current expectations and beliefs concerning future developments and their potential effects on our
company and its subsidiaries. There can be no assurance that future developments will be those that have been anticipated. These
forward-looking statements involve many risks, uncertainties (some of which are beyond our control) or other assumptions that may
cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements.
We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events
or otherwise, except as may be required under applicable securities laws.
You should refer
to the “Risk Factors” section of the report on Form 1-A POS, for a discussion of important factors that may
cause our actual results to differ materially from those expressed or implied by our forward- looking statements. We may
not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not
place undue reliance on our forward-looking statements. You should read this Quarterly Report on Form 10-Q and the documents
we have filed as exhibits to this Quarterly Report on Form 10-Q and the report on Form 1-A POS for the year ended December
31, 2016, completely and with the understanding our actual future results may be materially different from what we expect, or
events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we
make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions,
joint ventures or investments we may make.
Recent Developments
Acquisition of Screen Media
Ventures, LLC
On November 3, 2017,
we completed our acquisition of all of the membership interests of Screen Media Ventures, LLC (“Screen Media”)
for approximately $4.9 million in cash and the issuance of 35,000 shares of our Class A common stock and our Class Z warrants
exercisable into 50,000 shares of our Class A common stock at $12 per share (the “Purchase”). We are in the
process of ascertaining the fair value of the Class A common stock and Class Z warrants issued in the Purchase through an
independent valuation. Screen Media had no debt on the date of our Purchase.
The Merger Agreement
The acquisition of Screen Media by us was
consummated pursuant to an Agreement and Plan of Merger (“
Agreement
”), dated November 3, 2017, by and among
us, SMV Merger Sub, LLC, a Delaware limited liability company and wholly owned subsidiary of the Company (“
Merger Sub
”),
Screen Media, a Delaware limited liability company, and Media V Holdings, LLC, a Delaware limited liability company and the sole
member of Screen Media (“
MV Holding
”).
Pursuant to the Agreement, Merger Sub was
merged with and into Screen Media, the separate corporate existence of Merger Sub ceased, and Screen Media continued as the surviving
limited liability company of the merger and a wholly owned subsidiary of our Company.
Immediately prior to the execution of this
Agreement, all subordinated indebtedness owed by Screen Media or any of its subsidiaries was transferred and assumed by an entity
owned and controlled by the former principal equity holder of Screen Media, and all obligations owed by Screen Media with respect
thereto were terminated.
Immediately prior to the closing of the
merger, we made a loan to MV Holding in the principal amount of $5,522,855 (“
MV Holding Loan
”), which was evidenced
by a promissory note. The proceeds of the MV Holding Loan were promptly contributed by MV Holding to the capital of Screen Media
and immediately used, in part, by Screen Media to pay the sum of $4,905,355 (“
Bank Loan Satisfaction Payment
”)
in full satisfaction of all principal and interest owed by Screen Media under all loans to its banks, with the remainder of the
MV Holding Loan proceeds used to pay certain transaction expenses and liabilities of Screen Media. The entirety of the MV Holding
Loan was forgiven by us as part of the purchase price paid by us for the acquisition of Screen Media. As a result of the foregoing
transactions, Screen Media, as of the closing of the merger, had no indebtedness for borrowed money.
Screen Media – General
Screen Media distributes television series
and films worldwide, including operating a series of direct-to-consumer channels under the “Popcornflix®” brand,
one of the largest advertiser-supported direct-to-consumer online video services (“AVOD”). Screen Media owns the copyright
or long-term distribution rights to more than 1,200 television series and feature films, making it one of the largest independently
owned libraries of filmed entertainment in the world (the “Library”). Screen Media distributes its television series
and films through direct relationships across all media, including theatrical, home video, pay-per-view, free, cable and pay television,
video-on-demand (“VOD”) and new digital media platforms worldwide.
Screen Media is a strategic acquisition
for us. It accelerates our entry into the direct-to-consumer online video market through Popcornflix®. In addition, Screen
Media’s distribution capabilities across all media will allow us to distribute our produced television series directly and
eliminate the distribution fees (as much as 30% of revenues) that we currently pay to third parties for distribution of the rights
we retain when we produce series with our sponsors. We believe that the cost savings from Screen Media’s distribution capabilities
will enhance our revenues and profits from our produced television series.
Screen Media
generates meaningful revenue and EBITDA and is estimated to recognize net revenue in 2017 of approximately $12.0 million and
EBITDA of approximately $5.0 million. We expect that we will be able to increase Screen Media’s advertising revenue by
utilizing our existing sales force to sell these ads. We also expect our overall profitability to improve by realizing
expense reductions in rent, systems and corporate overhead. Screen Media’s operating results are approximately evenly
distributed over its fiscal quarters. As a result, in 2018 and thereafter, we expect our revenue and profits to be more
evenly distributed among our fiscal quarters. Further, the purchase price is significantly less than the independent
third-party valuation of Screen Media and its content library, done at the request of Screen Media in 2017, not
in the context of this transaction, which exceeded $25.0 million.
Popcornflix®
Popcornflix has an
extensive footprint with its apps downloaded in approximately 24 million Smartphone’s using iOS and Android operating
systems and other devices. During the twelve months ended September 30,
2017, Popcornflix had 15 million active annual users (including web-based users) and 180 million ad requests with an 85%
sell through rate. Average viewing time on all Popcornflix® devices was 47 minutes and 76 minutes on Roku at September 30, 2017.
Popcornflix®
has rights to over 3,000 films and approximately 60 television series representing approximately 1,500 episodes with new
programs added regularly. As a ‘free-to-consumer’ digital streaming channel, Popcornflix® is a highly sought
after direct-to-consumer online video platform that can be found on the web, iPhones and iPads, Android products,
Roku set-top boxes, Xbox consoles, Amazon Fire, Chromecast and Samsung and Panasonic internet connected televisions,
among others. Popcornflix® is available in 56 countries, including the United States, United Kingdom, Canada, Australia,
Scandinavia, Germany, France, Hong Kong, and Singapore with additional territories to be deployed.
Distribution Capability
Screen Media has distribution
agreements with virtually all media platforms ranging from cable and satellite VOD to Internet VOD (which includes Transaction
VOD (“TVOD”) for rentals or purchases of films), AVOD (for free-to-viewer streaming of films supported by advertisements)
and SVOD (for unlimited access to films for a monthly fee). Cable VOD is generally for new releases and Internet VOD (TVOD, AVOD,
and SVOD) is for both new releases and library titles.
For cable and
satellite VOD, Screen Media has direct distribution agreements with Time Warner Cable, DirecTV, Spectrum, Vubiquity and In
Demand to reach all cable- and satellite-delivered VOD outlets. VOD titles are released on a day-and-date basis alongside
home video release. VOD windows typically extend for a three to four month term. For internet VOD, Screen Media has
agreements with Amazon, iTunes, Samsung, YouTube, Hulu, Xbox, Netflix, Sony, and Vudu, among others, to offer Screen
Media’s titles on a streaming, download-to-own or download-to-rent basis.
Internationally,
Screen Media is rapidly expanding its digital distribution with agreements with iTunes, Sony PlayStation, Xbox, and
Viasat, among others. Screen Media’s titles are available on iTunes, Sony PlayStation and Xbox in the United Kingdom,
Australia, France, Germany, Italy and Hong Kong with additional territories added regularly.
Transaction Impact
In accordance with ASC 805,
“
Business Combinations
”, we will account for the acquisition by applying the acquisition method of accounting.
The acquisition method of accounting requires, among other things, that the assets acquired and the liabilities assumed in a business
combination be measured at their fair values as of the closing date of the transaction.
We anticipate that
the total purchase price will be less than the fair value of the net identifiable assets acquired. We are in the process of
ascertaining the respective fair values of the net identifiable assets through an independent valuation, and such information
will be provided on Form 8-K/A when filed.
The results of operations
of Screen Media will be included in our consolidated statements of operations as of the acquisition date. The acquisition of Screen
Media is expected to have a material positive impact on our consolidated financial position, results of operations and cash flows.
As a result of the Purchase, Adjusted EBITDA in the fourth quarter of 2017 is now expected to exceed $10.0 million.
Initial Public Offering of
Shares of Class A Common Stock
On August 17, 2017, we completed
our Initial Public Offering (“IPO”) of $30.0 million consisting of 2,500,000 shares of Class A common stock (“Class
A Shares”) at an offering price of $12.00 per share. The Class A Shares offered and sold in the IPO were comprised of (a)
an aggregate of 2,241,983 of our newly issued Class A Shares and (b) an aggregate of 258,017 issued and outstanding Class A Shares
that were sold by certain non-management, non-affiliated existing stockholders (“Selling Stockholder Shares”). We did
not receive any of the proceeds from the sale of Selling Stockholder Shares.
In connection with the completion
of our IPO, the Class A Shares were approved for listing on the Nasdaq Global Market under the symbol “CSSE”.
Our IPO resulted
in gross cash proceeds to the Company of approximately $26.9 million and $24.0 million of net cash proceeds, after
deducting cash selling agent discounts and commissions and offering expenses. The net proceeds were used to fully repay $4.1
million of senior secured notes payable (“Term Notes”) and $4.5 million of senior secured notes payable under the
revolving line of credit (“Credit Facility”). The remaining proceeds will be used by us for general corporate
purposes including working capital, acquisition of video content and other strategic transactions.
Vacation Rental Potential
Television Series
On June 20, 2017, we entered
into an agreement with HomeAway.com to receive corporate sponsorship funding for an episodic television series entitled
Vacation
Rental Potential.
This series will seek to provide viewers the information and inspiration needed to realize their dreams of
using real estate entrepreneurship to obtain financial success. The
Vacation Rental Potential
slate is comprised of 10,
half-hour episodes.
Business Overview
Chicken Soup for the Soul Entertainment,
Inc. (the “Company”, “we”, “us” or “our”) curates and shares video stories that
bring out the best of the human spirit. We create and distribute our video content under the
Chicken Soup for the Soul
brand
(the “Brand”). We have an exclusive, perpetual and worldwide license from Chicken Soup for the Soul, LLC (“CSS”),
a publishing and consumer products company, to create and distribute video content under the Brand. Chicken Soup for the Soul Holdings,
LLC is the parent company of CSS and our ultimate parent company.
Since our inception in January
2015, our business has grown rapidly and is profitable on an annual basis. For the full year 2016, our revenue was $8.1 million,
as compared to 2015 revenue for the full year of $1.5 million. We had net income of $0.8 million for the full year 2016, as compared
to a full year net loss of $0.8 million in 2015, our first year in business. Our 2016 Adjusted EBITDA was $3.8 million for the
full year, as compared to full year 2015 Adjusted EBITDA of $0.0 million.
We are aggressively growing
our business through a combination of organic growth, licensing and distribution arrangements, acquisitions, and strategic relationships.
We partner with highly-regarded
independent producers to develop and produce our video content. Using this approach provides us with access to a diverse pool of
creative ideas for new video content projects and allows us to scale our business on a variable cost basis. We seek committed funding
prior to moving forward with a project. Since we seek to secure both the committed funding and production capabilities for our
video content prior to moving forward with a project, we have high visibility into the profitability of a particular project before
committing to proceed with such project. In addition, we take limited financial risk on developing our projects (usually less than
$25,000 per project).
We are a Delaware corporation formed on
May 4, 2016. CSS Productions, LLC (“CSS Productions”), our predecessor and immediate parent company, was formed in
December 2014 by CSS, and initiated operations in January 2015. We were formed to create a discrete entity focused on video content
opportunities using the Brand. In connection with our succession to the operations of CSS Productions, all video content assets
owned by CSS and any of its affiliates, including all rights and obligations related thereto, were transferred to us upon formation
on May 4, 2016. Thereafter, CSS Productions’ operating activities substantially ceased and the Company continued the business
operations of producing and distributing the video content.
Use of Non-GAAP Financial
Measure
Our consolidated financial
statements are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”).
We use a non-GAAP financial measure to evaluate our results of operations and as a supplemental indicator of our operating performance.
The non-GAAP financial measure that we use is Adjusted EBITDA. Adjusted EBITDA (as defined below) is considered a non-GAAP financial
measure as defined by Regulation G promulgated by the SEC under the Securities Act of 1933, as amended. Due to the significance
of non-cash and non-recurring expenses recognized for the years ended December 31, 2016 and 2015, and for the nine months ended
September 30, 2017, and the likelihood of material non-cash and non-recurring expenses to occur in future periods, we believe
that this non-GAAP financial measure enhances the understanding of our historical and current financial results.
Further, we believe that Adjusted EBITDA
enables our board of directors and management to analyze and evaluate financial and strategic planning decisions that will directly
effect operating decisions and investments. The presentation of Adjusted EBITDA should not be construed as an inference that our
future results will be unaffected by unusual or non-recurring items or by non-cash items. This non-GAAP financial measure should
be considered in addition to, rather than as a substitute for, our actual operating results included in our condensed consolidated
financial statements. See “
Use of non-GAAP Financial Measure
” below for further discussion.
JOBS Act Accounting
Election
We are an “emerging growth
company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act,
emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS
Act until such time as those standards apply to private companies. We have irrevocably elected to avail ourselves of this exemption
from new or revised accounting standards, and, therefore, will not be subject to the same new or revised accounting standards as
public companies that are not emerging growth companies.
Reporting Segment
We operate in one reportable
business segment - the production and distribution of video content. We currently operate solely in the United States, but recently
entered into a distribution agreement with a company located in the United States for the distribution of an episodic television
series in Europe. We intend to continue to sell our video content internationally.
Seasonality and Cyclicality
Revenue derived from our long-form
and short-form production activities has been cyclical as a result of the timing of sponsorship agreements funding those activities.
To date, this has affected our production schedules and hence, our revenue, since we recognize revenue as each episode becomes
available for delivery or becomes available for, and for short-form online videos, as the videos are posted to a website for viewing.
As a result, to date we have reported the vast majority of our revenue in the fourth quarter of each year.
For 2018 and beyond, we will
seek to sign sponsorship contracts, and to begin production of series, throughout the year which should result in more balanced
revenue across all quarters of each year over time. Additionally, our acquisition of Screen Media should help us attain non-cyclical,
more balanced revenue throughout the year.
For the year ended December
31, 2016 and 2015, our quarterly revenue was as follows:
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
|
Total
|
|
Revenue - FYE 2016
|
|
$
|
1,113,637
|
|
|
$
|
1,154,545
|
|
|
$
|
136,364
|
|
|
$
|
5,714,086
|
|
|
$
|
8,118,632
|
|
% by Quarter
|
|
|
13.7
|
%
|
|
|
14.2
|
%
|
|
|
1.7
|
%
|
|
|
70.4
|
%
|
|
|
100.0
|
%
|
Revenue - FYE 2015 (a)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
159,091
|
|
|
$
|
1,347,727
|
|
|
$
|
1,506,818
|
|
% by Quarter
|
|
|
-
|
|
|
|
-
|
|
|
|
10.6
|
%
|
|
|
89.4
|
%
|
|
|
100.0
|
%
|
(a) Our first revenue was recorded
in the third quarter of 2015.
Financial Results of Operations
Revenue
Our television revenue is derived
primarily from corporate and charitable sponsors that pay us for the production of half-hour and one-hour episodic television programs.
Our online revenue is derived from funds paid to us for the production of short-form online videos and from content generated by
A Sharp, Inc., d/b/a A Plus (“A Plus”) under our distribution agreement with A Plus, a digital media company. In addition,
we have a substantial and growing pipeline of potential sponsors. Importantly, we believe that the inclusion of Screen Media’s
results of operations beginning on the date of the acquisition will result in significant and material increases in our revenue.
Cost of Revenue
Our cost of revenue is derived
from the amortization of capitalized programming costs relating to both television and short-form online videos. We record cost
of revenue based on the individual-film-forecast method. This method requires costs to be amortized in the proportion that current
period’s revenue bears to management’s estimate of ultimate revenue expected to be recognized from each production.
Our costs are fixed for each series before we begin production. We have a growing list of independent production companies that
we work with.
Selling, General and Administrative
Expenses
Our selling, general and administrative
expenses includes salaries and benefits, non-cash share-based compensation, public relations and investor relations fees, outside
director fees, professional fees and other overhead. A significant portion of selling, general and administrative expenses are
covered by our management agreement with CSS, as noted below.
Management and License Fees
We pay management fees of five
percent of our gross revenue to CSS pursuant to a Management Services Agreement. CSS provides us with the operational expertise
of its personnel, and we also receive other services, including accounting, legal, marketing, management, data access and back
office systems, office space and equipment usage. We believe that the terms and conditions of the CSS Management Services Agreement
are more favorable and cost effective to us than if we hired the full staff to operate the company.
We pay license and marketing
support fees of five percent of our gross revenue to CSS pursuant to a License Agreement. Four percent of this fee is a recurring
license fee for the right to use all video content of the Brand. One percent of this fee relates to marketing support activities
through CSS’ email distribution, blogs and other marketing and public relations resources. We believe that the terms and
conditions of the CSS License Agreement, which provides us with the rights to use the trademark and intellectual property in connection
with our video content, are more favorable to us than any similar agreement we could have negotiated with an independent third
party.
Interest Expense
Our interest expense is comprised
of cash interest paid on the Term Notes and the Credit Facility. As a result of using a portion of the net proceeds of the IPO
to pay in full the outstanding Term Notes and to pay down the Credit Facility, we have recorded lower interest expense in the third
quarter of 2017 and we should have much lower interest expense in the fourth quarter of 2017. However, we may choose to incur debt
under the available Credit Facility or other sources in connection with the growth of our business.
We also recorded
significant non-cash based interest as a result of the discount for the fair value of the Class W warrants that were issued
with the Term Notes and the Credit Facility. In addition, financing costs incurred to complete the sale of Term Notes and to
establish the Credit Facility were amortized over the term of the related debt.
Income Taxes
We provide for federal and state
income taxes currently payable, as well as those deferred resulting from temporary differences between reporting income and expenses
for financial statement purposes versus income tax purposes. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between carrying amount of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes, and are measured using the enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be recoverable. The effect of the change in the tax rate, if
it occurs, will be recognized as income or expense in the period of the enacted change in tax rate. A valuation allowance is established,
when necessary, to reduce deferred income tax asset to the amount that is more-likely-than-not to be realized.
RESULTS OF OPERATIONS FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2017 COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 2016
As noted above, to date the
vast majority of our revenue, and therefore our earnings, is recognized in the fourth quarter of the year since we recognize television
revenue as each episode becomes available for delivery or becomes available for broadcast, and for short-form online videos, as
the videos are posted to a website for viewing. For 2018 and beyond, we will seek to sign sponsorship contracts, and to begin production
of series, throughout the year which should result in more balanced revenue across all quarters of each year over time. Additionally,
Screen Media’s operating results are not generally seasonal and therefore are approximately evenly distributed over its fiscal
quarters. As a result, in 2018 and thereafter, we expect our revenue and profits to be more evenly distributed among our fiscal
quarters.
At the present time however,
because of our current stage of development, we generate a significant portion of our annual revenue in the fourth quarter of our
fiscal year. Therefore, the results of operations for the first three quarters of each year are not indicative of our results of
operations for the full year.
The following table presents
revenue and expense line items reported in our Unaudited Condensed Consolidated Statements of Operations and their corresponding
percentage of total revenue for the three months ended September 30, 2017 and 2016 and the period-over-period dollar and percentage
changes for those line items.
|
|
Three Months Ended September 30,
|
|
|
Change
|
|
|
|
2017
|
|
|
2016
|
|
|
Period to Period
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Television
|
|
$
|
-
|
|
|
|
0%
|
|
|
$
|
136,364
|
|
|
|
100%
|
|
|
$
|
(136,364
|
)
|
|
|
*
|
|
On-line
|
|
|
48,466
|
|
|
|
100%
|
|
|
|
-
|
|
|
|
0%
|
|
|
|
48,466
|
|
|
|
*
|
|
Total revenue
|
|
|
48,466
|
|
|
|
100%
|
|
|
|
136,364
|
|
|
|
100%
|
|
|
|
(87,898
|
)
|
|
|
-64%
|
|
Cost of revenue
|
|
|
-
|
|
|
|
0%
|
|
|
|
61,500
|
|
|
|
45%
|
|
|
|
(61,500
|
)
|
|
|
*
|
|
Gross profit
|
|
|
48,466
|
|
|
|
100%
|
|
|
|
74,864
|
|
|
|
55%
|
|
|
|
(26,398
|
)
|
|
|
-35%
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
690,676
|
|
|
|
1416%
|
|
|
|
1,793,963
|
|
|
|
1316%
|
|
|
|
(1,103,288
|
)
|
|
|
-62%
|
|
Management and license fees
|
|
|
4,846
|
|
|
|
10%
|
|
|
|
13,636
|
|
|
|
10%
|
|
|
|
(8,790
|
)
|
|
|
-64%
|
|
Total operating expenses
|
|
|
695,522
|
|
|
|
1426%
|
|
|
|
1,807,599
|
|
|
|
1326%
|
|
|
|
(1,112,077
|
)
|
|
|
-62%
|
|
Operating loss
|
|
|
(647,056
|
)
|
|
|
-1326%
|
|
|
|
(1,732,735
|
)
|
|
|
-1271%
|
|
|
|
1,085,679
|
|
|
|
-63%
|
|
Interest income
|
|
|
2,559
|
|
|
|
5%
|
|
|
|
4
|
|
|
|
0%
|
|
|
|
2,555
|
|
|
|
*
|
|
Interest expense
|
|
|
(124,142
|
)
|
|
|
-265%
|
|
|
|
(210,816
|
)
|
|
|
-155%
|
|
|
|
86,674
|
|
|
|
-39%
|
|
Loss before income taxes
|
|
|
(768,639
|
)
|
|
|
-1586%
|
|
|
|
(1,943,547
|
)
|
|
|
-1426%
|
|
|
|
1,174,908
|
|
|
|
-60%
|
|
Benefit from income taxes
|
|
|
(246,000
|
)
|
|
|
-508%
|
|
|
|
(857,000
|
)
|
|
|
-628%
|
|
|
|
611,000
|
|
|
|
-71%
|
|
Net loss
|
|
$
|
(522,639
|
)
|
|
|
-1078%
|
|
|
$
|
(1,086,547
|
)
|
|
|
-797%
|
|
|
$
|
563,908
|
|
|
|
-52%
|
|
* Not Meaningful
Revenue
As noted above, the vast majority
of our revenue is recognized in the fourth quarter of the year. Total revenue decreased by $87,898, or 64%, for the three months
ended September 30, 2017 compared to the prior year period. This was primarily due to the fact that no original episodes of our
television shows became available for delivery or broadcast during the three months ended September 30, 2017 due to production
start dates and network scheduling, which resulted in $0 television revenue being recorded. Online revenue of $48,466 was recorded
for the three months ended September 30, 2017, and $0 was recorded in the prior period, as discussed below. We recognize television
revenue as each episode becomes available for delivery or becomes available for broadcast, and we recognize online revenue when
videos are posted to a website for viewing. We believe that the inclusion of Screen Media’s results of operations beginning
on the date of the acquisition, will result in significant and material increases in our distribution, advertising and online revenue.
Television revenue
In October 2016,
Chicken
Soup for the Soul’s Hidden Heroes (“Hidden Heroes”)
, our first episodic television series, began its second
season airing on CBS Television Network (“CBS”) and continued airing through September 2017. Season one of
Hidden
Heroes
aired on CBS from October 2015 to September 2016. The
Hidden Heroes
slate for season one and season two was comprised
of half-hour episodes totaling 26 episodes, each airing twice over a 52-week season. The sponsor for
Hidden Heroes
, a stockholder
of our company, has agreed to fund the series for a third season.
As a result of CBS’ schedule,
no original episodes of
Hidden Heroes
season two aired during the three months ended September 30, 2017 compared to the
airing of one original episode of
Hidden Heroes
season one in the prior year period. We recognize revenue for episodic television
programs as each episode becomes available for delivery or becomes available for broadcast.
As noted above,
we generate a significant portion of our annual television revenue in the fourth quarter of our fiscal year. We anticipate
that our television revenue should become more evenly distributed throughout the year in the future as we expand our business
and diversify our video content offerings. Until such time, our quarter to quarter financial results are not comparable
within any single fiscal year or from fiscal year to fiscal year. As a result of the foregoing and other factors, our results
of operations may fluctuate significantly from period to period, and the results of any one period may not be indicative of
the results for any future period.
Online revenue
Online revenue was 100% and
0% of total revenue for the three months ended September 30, 2017 and for the prior year period, respectively. Our online revenue
includes revenue generated from the exhibition of our video content online, primarily our short-form video content, including our
Sips
™ and our net revenue earned through our A Plus Distribution Agreement. Producer payments due to A Plus per the
A Plus Distribution Agreement are recorded as a reduction to our recorded amount of revenue. The A Plus Distribution Agreement
was signed in the latter part of September 2016 and as a result, did not impact the three months ended September 30, 2016. Online
revenue is recognized when videos are first posted to a website for viewing. Additional online revenue is recognized as advertisements
are viewed.
Cost of Revenue
Our cost of revenue decreased
by $61,500, or 100%, for the three months ended September 30, 2017 compared to the prior year period, as we did not record cost
of revenue in the current year quarter as we record revenue earned from the A Plus Distribution Agreement on a net revenue basis.
Overall, we expect gross profit margin for the full year 2017 to be approximately the same as for the full year 2016.
Cost of revenue represents amortization
of programming costs in the proportion that current period’s revenue bears to management’s estimate of ultimate revenue
expected to be recognized from each production and to the extent that episodes were recognized as revenue by us.
We initially capitalize our
programming costs incurred to produce and develop our long-form and short-form video content. We capitalize all direct production
and financing costs, capitalized interest, when applicable, and production overhead.
The costs of producing our long-form
and short-form video content are amortized using the individual-film-forecast method. This method provides that costs are amortized
to cost of revenue in the proportion that the current period’s revenue compares to our estimate of the ultimate revenue expected
to be recognized, which spans several years.
Cost of revenue for
Hidden
Heroes
seasons one and two was 0% and 100% of total cost of revenue for the three months ended September 30, 2017 and for the
prior year period, respectively.
Selling, General and Administrative
The following table presents
selling, general and administrative expense line items for the three months ended September 30, 2017 and 2016 and the period-over-period
dollar and percentage changes for those line items.
|
|
Three Months Ended September 30,
|
|
|
Change
|
|
|
|
2017
|
|
|
2016
|
|
|
Period to Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payroll and benefits
|
|
$
|
16,067
|
|
|
$
|
234,661
|
|
|
$
|
(218,594
|
)
|
|
|
-93%
|
|
Share-based compensation
|
|
|
182,581
|
|
|
|
1,436,293
|
|
|
|
(1,253,712
|
)
|
|
|
-87%
|
|
Outside professional services
|
|
|
436,284
|
|
|
|
109,084
|
|
|
|
327,200
|
|
|
|
296%
|
|
Other costs
|
|
|
55,744
|
|
|
|
13,925
|
|
|
|
41,819
|
|
|
|
300%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
690,676
|
|
|
$
|
1,793,963
|
|
|
$
|
(1,103,287
|
)
|
|
|
-61%
|
|
Our selling, general and administrative
expenses decreased by $(1,103,287), or -61%, for the three months ended September 30, 2017 compared to the prior year period. This
was primarily due to a $1,253,712, or 87% decrease in non-cash share-based compensation.
For the three months ended September
30, 2016, share-based compensation resulted primarily from share-based awards issued to a former officer of the Company. See below
for further discussion of our 2017 Long Term Incentive Plan.
Excluding non-cash share-based
compensation, our selling, general and administrative expenses increased by $150,425, or 42%, for the three months ended September
30, 2017 compared to the prior year period. See “
Use of non-GAAP Financial Measure,
” below for further discussion
relating to selling, general and administrative expense.
Payroll and benefits decreased
by $218,594, or 93%, for the three months ended September 30, 2017 compared to the prior year period. This was primarily due to
the fact that the prior year period included costs, including severance, associated with a former officer of the Company. Furthermore,
during 2017 our employees and certain outside professional consultants spent a significant portion of their time directly on released,
in production and in development long-form episodic television series and short-form online video content. In accordance with GAAP,
these costs (including benefits) are capitalized as programming costs and amortized to cost of revenue as described above. The
total amount capitalized for the three months ended September 30, 2017 was $133,170.
Our outside professional services
increased by $327,200, or 300%, for the three months ended September 30, 2017 compared to the prior year period. This was primarily
due to our IPO, whereby we utilized public relations and investor relations firms leading up to, and after, our IPO during the
2017 period. Further, we currently use strategic advisors to advise us on possible acquisitions, mergers, joint ventures or investments
we may make.
Effective January 1, 2017, we
adopted our 2017 Long Term Incentive Plan (the “Plan”) to attract and retain certain employees. The Plan allows us
to issue up to one million common stock equivalents subject to the terms and conditions of the Plan. The Plan generally provides
for quarterly and semi-annual vesting over terms ranging from two to three years. We account for the Plan as an equity plan.
During 2017, we issued stock
options pursuant to the Plan. We recognize these stock options at fair value determined by applying the Black Scholes options pricing
model to the grant date market value of the underlying common shares. The non-cash share-based compensation expense is amortized
on a straight-line basis over their respective vesting periods. For the three months ended September 30, 2017, we recognized $142,043
of non-cash share-based compensation expense. We also award Class A common stock grants to outside directors and non-employee executive
producers and service providers. For the three months ended September 30, 2017, the Company recognized non-cash share-based compensation
expense of $40,539. For the three months ended September 30, 2016, the Company recognized $1,436,293 primarily for Class A common
stock grants awarded to a former officer of the Company, and to a lesser extent, to non-employee directors and individuals for
services rendered.
Management and License Fees
We incurred management and license
fees to CSS equal to 10% of the total revenue reported for each of the three months ended September 30, 2017 and 2016. On August
21, 2017, the Company paid to CSS $739,422 in management fees and $572,172 in license fees owed to CSS for the years 2015 and 2016
and for the six months ended June 30, 2017. See “
Affiliate Resources and Obligations”
below for further discussion
relating to the management services agreement and the license agreement. As indicated above, we believe that the terms and conditions
of these agreements are more favorable to us than any similar agreements we could have negotiated with independent third parties.
Interest Expense
For the three months ended September
30, 2017, we recorded interest expense totaling $124,142. Of this amount, $64,202, or 52%, was paid in cash and $59,940, or 48%,
was non-cash based. For the three months ended September 30, 2016, we recorded interest expense totaling $210,816. Of this amount,
$47,537, or 23%, was paid in cash and $163,279, or 77%, was non-cash based.
The following table presents
cash based and non-cash based interest expense for the three months ended September 30, 2017 and 2016:
|
|
Three Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Cash Based:
|
|
|
|
|
|
|
|
|
Term Notes
|
|
$
|
27,400
|
|
|
$
|
15,271
|
|
Revolving line of credit
|
|
|
36,802
|
|
|
|
31,375
|
|
License note - CSS
|
|
|
-
|
|
|
|
891
|
|
|
|
|
64,202
|
|
|
|
47,537
|
|
Non-Cash Based:
|
|
|
|
|
|
|
|
|
Amortization of debt discount
|
|
|
59,940
|
|
|
|
144,107
|
|
Amortization of deferred financing costs
|
|
|
-
|
|
|
|
19,172
|
|
|
|
|
59,940
|
|
|
|
163,279
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
124,142
|
|
|
$
|
210,816
|
|
We incurred interest expense
on our outstanding Term Notes prior to their repayment from the net proceeds of our IPO, and on net advances under our Credit Facility,
prior to its pay down. We also recorded non-cash based interest discount equal to the amortization of the fair value of the Class
W warrants that were issued with the Term Notes and the Credit Facility. Financing costs incurred to complete the sale of Term
Notes and to establish the Credit Facility are also amortized to non-cash based interest over their respective terms. Prior to
their repayment, the Term Notes bore interest at 5% per annum. Any advances we receive under the Credit Facility bears interest
at 5% per annum, plus an annual fee equal to 0.75% of the unused portion of the Credit Facility. See “
Liquidity and Capital
Resources”
below, for a full description of the Term Notes and the Credit Facility.
The sale of Term Notes first
occurred in July 2016. The aggregate principal balance sold by September 30, 2016 was $2,480,000 and by December 31, 2016 was $2,970,000.
The aggregate principal balance sold by May 2017 totaled $5,000,000. In June 2017, at the option of certain holders of the Term
Notes, the Company converted $918,000 of Term Notes into 102,060 Class A common shares. Immediately after our IPO, the aggregate
principal balance outstanding on the Term Notes of $4,082,000 was paid in full.
Advances under the Credit Facility
first occurred in May 2016. The net advances outstanding were $2,800,000 at September 30, 2016 and were $3,480,000 at December
31, 2016. The net advances outstanding were $4,500,000 just prior to our IPO. Immediately after our IPO, the net advance balance
of $4,500,000 was paid in full. We can request additional advances under the Credit Facility up to $4,500,000 at any time until
June 2018.
Benefit from Income Taxes
Our benefit from income taxes
consists of federal and state income taxes. We recorded an income tax benefit of $246,000 and $857,000 for the three months ended
September 30, 2017 and 2016, respectively. We apply the expected annual federal and state effective tax rates in determining our
taxes. See “
RESULTS OF OPERATIONS – FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 COMPARED WITH THE NINE MONTHS
ENDED SEPTEMBER 30, 2016”
below, for further discussion of income taxes.
Affiliate Resources and Obligations
CSS License Agreement
In May 2016, we entered into
a trademark and intellectual property license agreement with CSS, which we refer to as the “CSS License Agreement.”
Under the terms of the CSS License Agreement, we have been granted a perpetual, exclusive, worldwide license to produce and distribute
video content using the
Chicken Soup for the Soul
brand and related content, such as stories published in the
Chicken
Soup for the Soul
books. We paid CSS a one-time license fee of $5 million comprised of a $1.5 million cash payment and the
concurrent issuance to CSS of the CSS License Note, having a principal amount of $3.5 million and bearing interest at 0.50% per
annum. The CSS License Note was repaid on September 14, 2016.
We are also obligated to pay
CSS an incremental recurring license fee equal to 4% of our gross revenue for each calendar quarter, and a marketing fee of 1%
of our gross revenue for each calendar quarter, with each quarterly fee payable on or prior to the 45
th
day after the
end of the calendar quarter to which it relates. Under the terms of the CSS License Agreement, the first quarterly fee was payable
by us with respect to the quarter ended March 31, 2016, as CSS had already been rendering services to our predecessor with respect
to the video content business. Provided that the CSS License Agreement remains in place, CSS has agreed that it will not engage,
and will not cause or permit its subsidiaries (other than us) to engage, in the production or distribution of video content, including
that which is unrelated to the
Chicken Soup for the Soul
brand, except in connection with the marketing of their other products
and services.
On August 21, 2017, the Company
paid to CSS $572,172 in license fees owed for the years 2015 and 2016 and for the six months ended June 30, 2017. We believe that
the terms and conditions of the CSS License agreement, which provides us with the rights to use the trademark and intellectual
property in connection with our video content, are more favorable to us than any similar agreement we could have negotiated with
an independent third party.
CSS Management Agreement
In May 2016, we entered into
a management services agreement, that has an initial term of five years and automatically renews for additional one-year terms
at the discretion of the parties thereto, which we refer to as the “CSS Management Agreement.” Under the terms of the
CSS Management Agreement, we are provided with the broad operational expertise of CSS and its subsidiaries and personnel, including
the services of our chairman and chief executive officer, Mr. Rouhana, our vice chairman and chief strategy officer, Mr. Seaton,
our senior brand advisor and director, Ms. Newmark, and our chief financial officer, Mr. Pess.
The CSS Management Agreement
also provides for services, such as accounting, legal, marketing, management, data access and back-office systems, and provides
us with office space and equipment usage. We are obligated to pay CSS a management fee equal to 5% of our gross revenue for each
calendar quarter, with each quarterly payable on or prior the 45
th
day after the end of the calendar quarter to which
it relates. The first quarterly fee was payable by us with respect to the quarter ended March 31, 2016, as CSS had already been
rendering services to our predecessor with respect to the video content business.
In addition, for any sponsorship
which is arranged by CSS or its affiliates for (i) our video content or (ii) a multi-element transaction for which we receive a
portion of such revenue and CSS receives the remaining revenue (for example, a transaction that relates to both our video content
and CSS’ printed products), we shall pay a sales commission to CSS equal to 20% of the portion of such revenue we receive.
Each sales commission shall be paid within 30 days of the end of the month in which we receive it. If CSS collects the entire fee
from such multi-element transaction, CSS will remit our portion of such fee to us after deducting its sales commission. There were
no sales commissions earned or paid to CSS during the three months or nine month periods ended September 30, 2017 and 2016.
On August 21, 2017, the Company
paid to CSS $739,422 in management fees owed for the years 2015 and 2016 and for the six months ended June 30, 2017. We believe
that the terms and conditions of the CSS Management Agreement are more favorable and cost effective to us than if we hired the
full staff to operate the company.
A Plus Distribution Agreement
In September 2016, we entered into the A Plus Distribution
Agreement. A Plus develops and distributes high quality, empathetic short-form videos and articles to millions of people worldwide.
The A Plus Distribution Agreement has an initial term ending in September 2023. Under the terms of the A Plus Distribution Agreement,
we have the exclusive worldwide rights to distribute all video content (in any and all formats) and all editorial content (including
articles, photos and still images) created, produced, edited or delivered by A Plus. Under the terms of the A Plus Distribution
Agreement, we paid A Plus an advance of $3 million (the “A Plus Advance”). We recoup the A Plus Advance by retaining
the portion of gross revenue otherwise payable by the Company to A Plus and applying such A Plus Revenue to the recoupment of the
A Plus Advance. We will not pay A Plus its portion of gross revenue until such time as the A Plus Advance has been recouped in
full. A Plus is a digital media company founded, chaired, and partially owned by actor and investor Ashton Kutcher. Mr. Kutcher
owns 23%, third parties own 2%, and our affiliate, Chicken Soup for the Soul Digital, LLC, owns 75%, of A Plus.
Use of Non-GAAP Financial Measure
In addition to the results reported in
accordance with GAAP, we use a non-GAAP financial measure, which is not recognized under GAAP, as a supplemental indicator of
our operating performance. This non-GAAP financial measure is provided to enhance the readers understanding of our historical
and current financial performance. Management believes that this measure provides useful information in that it excludes amounts
that are not indicative of our core operating results and ongoing operations and provide a more consistent basis for comparison
between periods. The non-GAAP financial measure that we currently use is Adjusted EBITDA which is defined as follows:
“Adjusted EBITDA” means earnings
before interest, taxes, depreciation, amortization and non-cash share-based compensation expense, and also includes the gain on
bargain purchase of subsidiary and adjustments for other identified charges such as costs incurred to form our company and to prepare
for the offering of our Class A common stock to the public, prior to our IPO. Identified charges also include the cost of maintaining
a board of directors prior to being a publicly traded company. As our IPO has been completed, director fees will be deducted from
Adjusted EBITDA going forward. Adjusted EBITDA is not an earnings measure recognized by GAAP and does not have a standardized meaning
prescribed by GAAP; accordingly, Adjusted EBITDA may not be comparable to similar measures presented by other companies. We believe
Adjusted EBITDA to be a meaningful indicator of our performance that provides useful information to investors regarding our financial
condition and results of operations. The most comparable GAAP measure is operating income.
In addition, Screen Media has used a non-GAAP
financial measure to evaluate its results of operations and as a supplemental indicator of operating performance. The non-GAAP
financial measure that Screen Media has used is EBITDA. EBITDA (as defined below) is considered a non-GAAP financial measure as
defined by Regulation G promulgated by the SEC under the Securities Act of 1933, as amended. We believe that this measure provides
useful information in that it excludes amounts that are not indicative of Screen Media’s core operating results and ongoing
operations and provides a more consistent basis for comparison between periods.
“EBITDA” means earnings before
interest, taxes, depreciation and amortization. EBITDA is not an earnings measure recognized by GAAP and does not have a standardized
meaning prescribed by GAAP; accordingly, EBITDA may not be comparable to similar measures presented by other companies. We believe
EBITDA to be a meaningful indicator of Screen Media’s performance that provides useful information regarding its financial
condition and results of operations. The most comparable GAAP measure is operating income.
Reconciliation of Unaudited
Historical Results to Adjusted EBITDA
A reconciliation of net loss
to Adjusted EBITDA is as follows:
|
|
Three Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Net loss, as reported
|
|
$
|
(522,639
|
)
|
|
$
|
(1,086,545
|
)
|
|
|
|
|
|
|
|
|
|
Benefit from income taxes
|
|
|
(246,000
|
)
|
|
|
(857,000
|
)
|
|
|
|
|
|
|
|
|
|
Interest expense, net of interest income (a)
|
|
|
121,583
|
|
|
|
210,812
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
|
182,581
|
|
|
|
1,436,293
|
|
|
|
|
|
|
|
|
|
|
Severance cost - former officer
|
|
|
-
|
|
|
|
225,828
|
|
|
|
|
|
|
|
|
|
|
Organization costs and directors costs (b)
|
|
|
123,887
|
|
|
|
104,550
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(340,588
|
)
|
|
$
|
33,938
|
|
(a) Includes non-cash amortization
of debt discounts and amortization of deferred financing costs of $59,940 and $163,279 for the three months ended September 30,
2017 and 2016, respectively.
(b) Includes the costs incurred
to form our company and to prepare for the initial offering of our common stock to the public. This also includes the costs of
maintaining a board of directors prior to being a publicly traded company, and for the three months ended September 30, 2017, this
includes the costs of utilizing public relations and investor relations firms totaling $111,387, prior to being a publicly traded
company.
RESULTS OF OPERATIONS FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2017 COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 2016
As noted above, to date the
vast majority of our revenue, and therefore our earnings, is recognized in the fourth quarter of the year since we recognize television
revenue as each episode becomes available for delivery or becomes available for broadcast, and for short-form online videos, as
the videos are posted to a website for viewing. For 2018 and beyond, we will seek to sign sponsorship contracts, and to begin production
of series, throughout the year which should result in more balanced revenue across all quarters of each year over time. Additionally,
Screen Media’s operating results are not generally seasonal and therefore are approximately evenly distributed over its fiscal
quarters. As a result, in 2018 and thereafter, we expect our revenue and profits to be more evenly distributed among our fiscal
quarters. At the present time however, because of our current stage of development, we generate a significant portion of our annual
revenue in the fourth quarter of our fiscal year. Therefore, the results of operations for the first three quarters of each year
are not indicative of our results of operations for the full year.
The following table presents
revenue and expense line items reported in our Unaudited Condensed Consolidated Statements of Operations and their corresponding
percentage of total revenue for the nine months ended September 30, 2017 and 2016 and the period-over-period dollar and percentage
changes for those line items.
|
|
Nine Months Ended September 30,
|
|
|
Change
|
|
|
|
2017
|
|
|
2016
|
|
|
Period to Period
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Television
|
|
$
|
1,859,536
|
|
|
|
82%
|
|
|
$
|
2,204,546
|
|
|
|
92%
|
|
|
$
|
(345,010
|
)
|
|
|
-16%
|
|
On-line
|
|
|
398,745
|
|
|
|
18%
|
|
|
|
200,000
|
|
|
|
8%
|
|
|
|
198,745
|
|
|
|
99%
|
|
Total revenue
|
|
|
2,258,281
|
|
|
|
100%
|
|
|
|
2,404,546
|
|
|
|
100%
|
|
|
|
(146,265
|
)
|
|
|
-6%
|
|
Cost of revenue
|
|
|
794,923
|
|
|
|
35%
|
|
|
|
1,088,727
|
|
|
|
45%
|
|
|
|
(293,804
|
)
|
|
|
-27%
|
|
Gross profit
|
|
|
1,463,358
|
|
|
|
65%
|
|
|
|
1,315,819
|
|
|
|
55%
|
|
|
|
147,539
|
|
|
|
11%
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
1,505,589
|
|
|
|
67%
|
|
|
|
2,214,036
|
|
|
|
92%
|
|
|
|
(708,447
|
)
|
|
|
-32%
|
|
Management and license fees
|
|
|
225,828
|
|
|
|
10%
|
|
|
|
240,454
|
|
|
|
10%
|
|
|
|
(14,626
|
)
|
|
|
-6%
|
|
Total operating expenses
|
|
|
1,731,417
|
|
|
|
77%
|
|
|
|
2,454,490
|
|
|
|
102%
|
|
|
|
(723,073
|
)
|
|
|
-29%
|
|
Operating loss
|
|
|
(268,059
|
)
|
|
|
-11%
|
|
|
|
(1,138,671
|
)
|
|
|
-47%
|
|
|
|
870,612
|
|
|
|
-76%
|
|
Interest income
|
|
|
2,568
|
|
|
|
0%
|
|
|
|
11
|
|
|
|
0%
|
|
|
|
2,557
|
|
|
|
*
|
|
Interest expense
|
|
|
(1,176,580
|
)
|
|
|
-53%
|
|
|
|
(256,395
|
)
|
|
|
-11%
|
|
|
|
(920,185
|
)
|
|
|
359%
|
|
Loss before income taxes
|
|
|
(1,442,071
|
)
|
|
|
-64%
|
|
|
|
(1,395,055
|
)
|
|
|
-58%
|
|
|
|
(47,016
|
)
|
|
|
3%
|
|
Benefit from income taxes
|
|
|
(87,000
|
)
|
|
|
-4%
|
|
|
|
(587,000
|
)
|
|
|
-24%
|
|
|
|
500,000
|
|
|
|
-85%
|
|
Net loss
|
|
$
|
(1,355,071
|
)
|
|
|
-60%
|
|
|
$
|
(808,055
|
)
|
|
|
-34%
|
|
|
$
|
(547,016
|
)
|
|
|
68%
|
|
* Not Meaningful
Revenue
As previously discussed, the
vast majority of our revenue is recognized in the fourth quarter of the year. Total revenue decreased by $146,265, or 6%, for the
nine months ended September 30, 2017 compared to the prior year period. This decrease was due to a $345,010, or 16% decrease, in
television revenue, offset in part, by a $198,745, or 99% increase in online revenue. We recognize television revenue as each episode
becomes available for delivery or becomes available for broadcast, and we recognize online revenue when videos are posted to a
website for viewing. We believe that the inclusion of Screen Media’s results of operations beginning on the date of the acquisition,
will result in significant and material increases in our distribution, advertising and online revenue.
Television revenue
In October 2016,
Hidden Heroes
,
our first episodic television series, began its second season airing on CBS and continued airing through September 2017. Season
one of
Hidden Heroes
aired on CBS from October 2015 to September 2016. The sponsor for
Hidden Heroes
, a stockholder
of our company, has agreed to fund the series for a third season.
As a result of CBS’ schedule,
less original episodes of
Hidden Heroes
season two aired during the nine months ended September 30, 2017 compared to the
airing of original episodes of season one in the prior year period. We recognize revenue for episodic television programs as each
episode becomes available for delivery or becomes available for broadcast.
Also included in television
revenue for the nine months ended September 30, 2017, is $160,000 related to a distribution agreement we entered into with a company
located in the United States, for the distribution of our second episodic television series entitled
Project Dad, a Chicken
Soup for the Soul Original
in Europe (the “PD Agreement”).
We generate a significant portion
of our annual revenue in the fourth quarter of our fiscal year. We anticipate that our revenue should become more evenly distributed
throughout the year in the future as we expand our business and diversify our video content offerings. Until such time, our quarter
to quarter financial results are not comparable within any single fiscal year or from fiscal year to fiscal year. As a result of
the foregoing and other factors, our results of operations may fluctuate significantly from period to period, and the results of
any one period may not be indicative of the results of any future period.
Online revenue
Online revenue was 18% and 8%
of total revenue for the nine months ended September 30, 2017 and for the prior year period, respectively. Our online revenue includes
revenue generated from the exhibition of our video content online, primarily our short-form video content, including our
Sips
™
and our net revenue earned through our A Plus Distribution Agreement. Producer payments due to A Plus per the Distribution Agreement
are recorded as a reduction to our recorded amount of revenue. The A Plus Distribution Agreement was signed in the latter part
of September 2016 and as a result, did not impact the nine months ended September 30, 2016. Online revenue is recognized when videos are first posted to a website for viewing.
Additional online revenue is recognized as advertisements are viewed.
Cost of Revenue
Our cost of revenue decreased
by $293,804, or 27%, for the nine months ended September 30, 2017 compared to the prior year period. As a result, gross profit
margin for 2017 increased to 65% from 55%. Overall, we expect gross profit margin for the full year 2017 to be approximately the
same as for the full year 2016.
In addition, the decrease in
cost of revenue for the nine months ended September 30, 2017, resulted primarily from $160,000 in television revenue recognized
related to the PD Agreement, for which there is no related cost of revenue.
Cost of revenue represents amortization
of programming costs in the proportion that current period’s revenue bears to management’s estimate of ultimate revenue
expected to be recognized from each production and to the extent that episodes were recognized as revenue by us.
We initially capitalize our
programming costs incurred to produce and develop our long-form and short-form video content. We capitalize all direct production
and financing costs, capitalized interest, when applicable, and production overhead.
The costs of producing our long-form
and short-form video content are amortized using the individual-film-forecast method. This method provides that costs are amortized
to cost of revenue in the proportion that the current period’s revenue compares to our estimate of the ultimate revenue expected
to be recognized, which spans several years.
Cost of revenue for
Hidden
Heroes
seasons one and two was 94% and 87% of total cost of revenue for the nine months ended September 30, 2017 and for the
prior year period, respectively.
Selling, General and Administrative
The following table presents
selling, general and administrative expense line items for the nine months ended September 30, 2017 and 2016 and the period-over-period
dollar and percentage changes for those line items.
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
Change
|
|
|
|
2017
|
|
|
2016
|
|
|
Period to Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payroll and benefits
|
|
$
|
149,285
|
|
|
$
|
421,524
|
|
|
$
|
(272,239
|
)
|
|
|
-65%
|
|
Share-based compensation
|
|
|
474,772
|
|
|
|
1,513,311
|
|
|
|
(1,038,539
|
)
|
|
|
-69%
|
|
Outside professional services
|
|
|
713,119
|
|
|
|
173,247
|
|
|
|
539,872
|
|
|
|
312%
|
|
Other costs
|
|
|
168,413
|
|
|
|
105,954
|
|
|
|
62,459
|
|
|
|
59%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,505,589
|
|
|
$
|
2,214,036
|
|
|
$
|
(708,447
|
)
|
|
|
-32%
|
|
Our selling, general and administrative
expenses decreased by $708,447, or 32%, for the nine months ended September 30, 2017 compared to the prior year period. This was
primarily due to a $1,038,539, or 69% decrease in non-cash share-based compensation offset, in part, by a $539,872 increase, in
outside professional services.
For the nine months ended September
30, 2016, 95% of the share-based compensation resulted primarily from share-based awards issued to a former officer of the Company.
See below for further discussion of our 2017 Long Term Incentive Plan.
Excluding non-cash share-based
compensation, our selling, general and administrative expenses increased by $330,092, or 47%, for the nine months ended September
30, 2017 compared to the prior year period. See “
Use of non-GAAP Financial Measure,
” below for further discussion
relating to selling, general and administrative expense.
Payroll and benefits decreased
by $272,239, or 65%, for the nine months ended September 30, 2017 compared to the prior year period. This was primarily due to
the fact that the prior year period included costs, including severance, associated with a former officer of the Company. Furthermore,
during 2017 our employees and certain outside professional consultants spent a significant portion of their time directly on released,
in production and in development long-form episodic television series and short-form online video content. In accordance with GAAP,
these costs (including benefits) are capitalized as programming costs and amortized to cost of revenue as described above. The
total amount capitalized for the nine months ended September 30, 2017 was $264,824.
Our outside professional services
increased by $539,872, or 312%, for the nine months ended September 30, 2017 compared to the prior year period. This was primarily
due to our IPO, whereby we utilized public relations and investor relations firms leading up to, and after, our IPO during the
2017 period. Further, we currently use strategic advisors to advise us on possible acquisitions, mergers, joint ventures or investments
we may make.
Effective January 1, 2017, we
adopted our Plan to attract and retain certain employees. The Plan allows us to issue up to one million common stock equivalents
subject to the terms and conditions of the Plan. The Plan generally provides for quarterly and bi-annual vesting over terms ranging
from two to three years. We account for the Plan as an equity plan.
During 2017, we issued stock
options pursuant to the Plan. We recognize these stock options at fair value determined by applying the Black Scholes options pricing
model to the grant date market value of the underlying common shares. The non-cash share-based compensation expense is amortized
on a straight-line basis over their respective vesting periods. For the nine months ended September 30, 2017, we recognized $394,238
of non-cash share-based compensation expense. We also awarded Class A common stock grants to outside directors and non-employee executive
producers and service providers. For the nine months ended September 30, 2017, the Company recognized non-cash share-based compensation
expense of $80,534. For the nine months ended September 30, 2016, the Company recognized $1,513,311 primarily for Class A common
stock grants awarded to a former officer of the Company, and to a lesser extent, to non-employee directors and individuals for
services rendered.
Management and License Fees
We incurred management and license
fees to CSS equal to 10% of the total revenue reported for each of the nine months ended September 30, 2017 and 2016. On August
21, 2017, the Company paid to CSS $739,422 in management fees and $572,172 in license fees owed to CSS for the years 2015 and 2016
and for the six months ended June 30, 2017. See “
Affiliate Resources and Obligations”
above for further discussion
relating to the management services agreement and the license agreement. We believe that the terms and conditions of these agreements
are more favorable to us than any similar agreements we could have negotiated with independent third parties.
Interest Expense
For the nine months ended September
30, 2017, we recorded interest expense totaling $1,176,580. Of this amount, $267,000, or 23%, was paid in cash and $909,580, or
77%, was non-cash based. For the nine months ended September 30, 2016, we recorded interest expense totaling $256,395. Of this
amount, $63,236, or 25%, was paid in cash and $193,159, or 75%, was non-cash based.
The following table presents
cash based and non-cash based interest expense for the nine months ended September 30, 2017 and 2016:
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Cash Based:
|
|
|
|
|
|
|
|
|
Term Notes
|
|
$
|
136,526
|
|
|
$
|
15,271
|
|
Revolving line of credit
|
|
|
130,474
|
|
|
|
44,896
|
|
License note - CSS
|
|
|
-
|
|
|
|
3,069
|
|
|
|
|
267,000
|
|
|
|
63,236
|
|
Non-Cash Based:
|
|
|
|
|
|
|
|
|
Amortization of debt discount
|
|
|
865,833
|
|
|
|
173,276
|
|
Amortization of deferred financing costs
|
|
|
43,747
|
|
|
|
19,883
|
|
|
|
|
909,580
|
|
|
|
193,159
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,176,580
|
|
|
$
|
256,395
|
|
We incurred interest expense
on our outstanding Term Notes prior to their repayment from the net proceeds of our IPO, and on net advances under our Credit Facility,
prior to its pay down. We also record non-cash based interest discount equal to the amortization of the fair value of the Class
W warrants that were issued with the Term Notes and the Credit Facility. Financing costs incurred to complete the sale of Term
Notes and to establish the Credit Facility are also amortized to non-cash based interest over their respective terms. Prior to
their repayment, the Term Notes bore interest at 5% per annum. Any advances we receive under the Credit Facility bears interest
at 5% per annum, plus an annual fee equal to 0.75% of the unused portion of the Credit Facility. See “
Liquidity and Capital
Resources”
below, for a full description of the Term Notes and the Credit Facility.
The sale of Term Notes first
occurred in July 2016. The aggregate principal balance sold by September 30, 2016 was $2,480,000 and by December 31, 2016 was $2,970,000.
The aggregate principal balance sold by May 2017 totaled $5,000,000. In June 2017, at the option of certain holders of the Term
Notes, the Company converted $918,000 of Term Notes into 102,060 Class A common shares. Immediately after our IPO, the aggregate
principal balance outstanding on the Term Notes of $4,082,000 was paid in full.
Advances under the Credit Facility
first occurred in May 2016. The net advances outstanding were $2,800,000 at September 30, 2016 and were $3,480,000 at December
31, 2016. The net advances outstanding were $4,500,000 just prior to our IPO. Immediately after our IPO, the net advance balance
of $4,500,000 was paid in full. We can request additional advances under the Credit Facility up to $4,500,000 at any time until
June 2018.
Benefit from Income Taxes
The Company’s benefit
from income taxes consists of federal and state taxes in amounts necessary to align our year-to-date tax provision with the effective
rate that we expect to achieve for the full year.
For the nine months ended September
30, 2017 and 2016, we reported an income tax benefit of $87,000 and $587,000, respectively, consisting of federal and state taxes
currently payable and deferred. The effective tax rate for the nine months ended September 30, 2017 and 2016 was 6% and 42%, respectively.
The effective rate for the nine months ended September 30, 2017 was significantly impacted by permanent differences of approximately
$1.3 million which consisted principally of amortization of debt discounts included in interest expense and the impact of incentive
stock options issued under the Company’s Long-Term Incentive Plan.
Temporary timing differences
consist primarily of net programming costs being deductible for tax purposes in the period incurred (under Internal Revenue Code
Section 181 up to December 31, 2016) as contrasted to the capitalization and amortization for financial reporting purposes under
the guidance of ASC 926 —
Entertainment — Films
. Additionally, the Company amortized, for tax purposes only,
an intangible asset under Section 197 of the Internal Revenue Code, with such amortization not reported in the financial statements.
See
“
RESULTS OF
OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2017 COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 2016”
above, for a description of:
- our affiliate resources and
obligations.
- our use of non-GAAP financial
measures, and
- our definition of Adjusted
EBITDA.
Reconciliation of Unaudited
Historical Results to Adjusted EBITDA
A reconciliation of net loss
to Adjusted EBITDA is as follows:
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Net loss, as reported
|
|
$
|
(1,355,071
|
)
|
|
$
|
(808,055
|
)
|
|
|
|
|
|
|
|
|
|
Benefit from income taxes
|
|
|
(87,000
|
)
|
|
|
(587,000
|
)
|
|
|
|
|
|
|
|
|
|
Interest expense, net of interest income (a)
|
|
|
1,174,011
|
|
|
|
256,383
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
|
474,772
|
|
|
|
1,513,311
|
|
|
|
|
|
|
|
|
|
|
Severance cost - former officer
|
|
|
-
|
|
|
|
225,828
|
|
|
|
|
|
|
|
|
|
|
Organization costs and directors costs (b)
|
|
|
290,124
|
|
|
|
217,513
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
496,836
|
|
|
$
|
817,980
|
|
(a) Includes non-cash amortization
of debt discounts and amortization of deferred financing costs of $909,580 and $193,159 for the nine months ended September 30,
2017 and 2016, respectively.
(b) Includes the costs incurred
to form our company and to prepare for the initial offering of our common stock to the public. This also includes the costs of
maintaining a board of directors prior to being a publicly traded company, and for the nine months ended September 30, 2017, this
includes the costs of utilizing public relations and investor relations firms totaling $240,124, prior to being a publicly traded
company.
LIQUIDITY AND CAPITAL RESOURCES
Initial Public Offering of
Shares of Class A Common Stock
As described above under “
Recent
Developments”
, on August 17, 2017, we completed our IPO of $30.0 million consisting of 2,500,000 shares of Class A common
stock (“Class A Shares”) at an offering price of $12.00 per share. The Class A Shares offered and sold in the IPO were
comprised of (a) an aggregate of 2,241,983 of our newly issued Class A Shares and (b) an aggregate of 258,017 issued and outstanding
Class A Shares that were sold by certain non-management, non-affiliated existing stockholders (“Selling Stockholder Shares”).
We did not receive any of the proceeds from the sale of Selling Stockholder Shares. In connection with the completion of our IPO,
the Class A Shares were approved for listing on the Nasdaq Global Market under the symbol “CSSE”.
Our IPO resulted in gross cash
proceeds to the Company of approximately $26.9 million and $24.0 million of net cash proceeds, after deducting cash
selling agent discounts and commissions and offering expenses. The net proceeds were used to fully repay $4.1 million of Term
Notes and $4.5 million of senior secured notes payable under the Credit Facility. We can request additional advances under
the Credit Facility up to $4.5 million at any time until June 2018. The remaining net proceeds of the IPO will be used by us
for general corporate purposes including working capital, acquisition of video content and strategic transactions.
Subsequent to our IPO, we have
significant liquidity from cash on hand, accounts receivable due to us in the near term, and our unused Credit Facility of $4.5
million. In addition, we expect positive cash flow from operations in the fourth quarter of 2017 and thereafter.
Acquisition of Screen Media
Ventures, LLC
As described under “
Recent Developments
”
above, on November 3, 2017, we completed our acquisition of all of the membership interests of Screen Media for approximately
$4.9 million in cash and the issuance of 35,000 shares of our Class A common stock and our Class Z warrants exercisable into 50,000
shares of our Class A common stock at $12 per share. We are in the process of ascertaining the fair value of the Class A common
stock and Class Z warrants issued through an independent valuation. We estimate that total closing costs related
to the acquisition will be approximately $2.1 million and these closing costs were provided from cash and cash equivalents on
hand. We believe that the operations of Screen Media will be cash flow positive from the date of the acquisition forward and that
it will be accretive to Adjusted EBITDA immediately.
Cash Requirements
After giving effect to the funds
used to complete the purchase of Screen Media, we believe our cash and cash equivalents on hand should be sufficient to meet our
cash requirements for at least the next twelve months. However, any projections of future cash needs and cash flows are subject
to substantial uncertainty. It is possible that we could incur unexpected costs and expenses in the future, fail to collect significant
amounts that may be owed to us, or experience unexpected cash requirements that would force us to seek additional financing. In
this event, additional financing would only be required if net advances available under the Credit Facility of $4.5 million were
insufficient to meet unexpected cash requirements, or the Credit Facility is near its maturity date of June 2018, without the maturity
date being extended. If we seek additional financing, we would likely issue additional equity or debt securities, and as a result,
stockholders may experience additional dilution or the new debt or equity securities may have rights, preferences or privileges
more favorable than those of existing holders of our debt or equity. In this event, if additional financing is not available or
is not available on acceptable terms, we may be required to delay or reduce the scope of our video content production plans.
Financing Plan Prior to IPO
Pursuant to our financing plan
prior to the IPO, we utilized our Credit Facility, primarily for working capital, and we sold Term Notes and Class A common stock
in private placements as follows:
Credit Facility
On May 12, 2016, we entered
into the Credit Facility with the facility lender, an affiliate of Mr. Rouhana. Under the terms of the Credit Facility, as amended
as of December 12, 2016, January 24, 2017 and March 27, 2017, we may borrow, repay and reborrow up to an aggregate of $4.5 million
through June 30, 2018. Our payment obligations under the Credit Facility are senior obligations and secured by a first priority
security interest in all of our assets, thus having the same priority as the security interest granted by us to the holders of
the Term Notes, prior to their repayment. The proceeds of the loans made under the Credit Facility were used by us for working
capital and general corporate purposes.
Loans under the Credit Facility
bear interest at 5% per annum, payable monthly in arrears in cash. We are also obligated to pay the facility lender an annual fee
equal to 0.75% of the unused portion of the Credit Facility. Principal under the Credit Facility (and all accrued but unpaid interest
thereon) shall be paid by us on or prior to June 30, 2018 (the “Facility Maturity Date”). If the Credit Facility is
still outstanding at the Facility Maturity Date, or, if prior to that date there is an event of default as prescribed by the Credit
Facility, then (a) all principal and interest may be exchanged into shares of Class A common stock of the Company on the same terms
as the Company’s most recently completed equity financing, provided that under no circumstances shall the pre-money valuation
used for this exchange be less than $52,560,000, (b) the Facility Maturity Date may be extended as happened in January 2017 by
mutual agreement of all parties, or (c) all principal and interest will be paid in full. As previously noted, the Credit Facility
was paid in full from the net proceeds of our IPO and hence, the full $4.5 million may be borrowed by us until the Facility Maturity
Date.
Debt Private Placement
Pursuant to our financing plan
prior to our IPO, we sold a total of $5.0 million of Term Notes and Class W warrants in a private placement. Beginning in July
2016 and through December 31, 2016, we sold in a private placement (“Debt Private Placement”) to accredited investors
$3.0 million aggregate principal amount of Term Notes and Class W warrants to purchase an aggregate of 252,450 shares of Class
A common stock. From January 1, 2017 through May 3, 2017, we sold an additional $2.0 million aggregate principal amount of Term
Notes and Class W warrants to purchase an additional aggregate of 172,550 shares of Class A common stock in the Debt Private Placement.
The Term Notes required interest
at 5% per annum, payable monthly in arrears in cash. The principal of the Term Notes (including all accrued, but unpaid interest
thereon) were originally payable by us on the earlier of (a) June 30, 2017 and (b) the third business day following consummation
of (i) an initial public offering (including this offering) and (ii) any future equity offering (other than as a result of the
exercise of our Class W warrants) resulting in gross proceeds to us of at least $7.0 million (the “Term Notes Original Maturity
Date”).
In June 2017, we requested that
the holders of our Term Notes extend the maturity date thereof to the earlier of (a) July 31, 2017 and (b) the date that is three
business days following the consummation of the initial closing of the IPO (such earlier date, the “Term Notes Extended Maturity
Date”). All holders (100%) of the Term Notes agreed to the Term Notes Extended Maturity Date. In connection with the extension,
we offered all holders of our Term Notes the opportunity to purchase shares of our Class A common stock at $9.00 per share (with
three Class Z warrants also being issued to them for each ten shares purchased) through the payment of cash or conversion of principal
under their Term Notes. In June 2017, holders of $0.9 million aggregate principal amount of the Term Notes, including three of
our executive officers, elected to convert such principal amount into an aggregate of 102,060 shares of Class A common stock and
30,618 Class Z warrants.
In July 2017, we requested that
the holders of our Term Notes further extend the maturity date thereof to the earlier of (a) August 31, 2017 and (b) the date that
is three business days following the consummation of the initial closing of the IPO (such earlier date, the “Term Notes Final
Extended Maturity Date”). All holders (100%) of the Term Notes agreed to the Term Notes Final Extended Maturity Date. No
consideration was provided to the holders of the Term Notes in exchange for this extension. Interest on the Term Notes continued
to accrue and was paid on the Term Notes Extended Maturity Date. The Term Notes were repaid in full from the proceeds of the IPO.
Equity Private Placements
Pursuant to our financing plan
prior to our IPO, we sold a total of approximately $2.5 million of Class A common stock and warrants in private placements. Beginning
in June 2016 and through November 2016, we sold in a separate private placement to accredited investors $1.0 million of units,
consisting of an aggregate of 170,960 shares of Class A common stock and Class W warrants to purchase an aggregate of 51,288 shares
of Class A common stock.
Beginning in December 2016 and
through March 2017, we sold in a separate private placement to accredited investors $975,710 of units, consisting of an aggregate
of 150,112 shares of Class A common stock and Class W warrants to purchase an aggregate of 45,034 shares of Class A common stock.
During May and June 2017, we
sold in two separate equity private placements, a total of an aggregate of 55,000 shares of Class A common stock and Class Z warrants
to purchase an aggregate of 50,000 shares of Class A common stock. The Class Z warrants are exercisable at $12 per share.
Cash Flows
Our principal source of liquidity
has been from our financing activities. Our cash and cash equivalents balance, was $10,076,573 as of September 30, 2017 and $507,247
as of December 31, 2016.
Cash flow information for the
nine months ended September 30, 2017 (“2017”) and for the nine months ended September 30, 2016 (“2016”)
is as follows:
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(6,594,161
|
)
|
|
$
|
(865,092
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
-
|
|
|
|
(5,000,000
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
16,163,487
|
|
|
|
6,977,059
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
$
|
9,569,326
|
|
|
$
|
1,111,967
|
|
Operating Activities
Our operating activities required
a net use of cash in 2017 totaling $6.6 million. This use of cash resulted primarily from a net loss of $1.4 million, our investment
in in-production and in-development programming costs of $4.3 million and increased prepaid distribution fees related to A Plus
of $1.5 million. Additionally, the net use of cash was impacted by increased trade accounts receivable of $1.0 million due primarily
to payments to be received for
Hidden Heroes,
and an increase in prepaid expenses of $1.2 million for prepaid advisory services
fees. The above was offset, in part, by non-cash stock compensation of $0.5 million, non-cash amortization of debt discounts and
deferred financing costs of $0.9 million, and amortization of programming costs of $0.8 million.
For 2016, our operating activities
required a net use of cash totaling $0.9 million. This use of cash resulted from primarily from a net loss of $0.8 million, our
investment in in-production and in-development programming costs of $4.1 million, increased trade accounts receivable of $0.8 million
due primarily to payments to be received for
Hidden Heroes
. The above was offset, in part, by non-cash stock compensation
of $1.5 million and increased deferred revenue related to
Project Dad
and
Hidden Heroes
of $2.5 million.
Investing Activities
No investing activities were
recorded in 2017. For 2016, investing activities were related solely to the license fee of $5.0 million we paid to CSS pursuant
to the CSS License Agreement, by which we have been granted a perpetual, exclusive, worldwide license to produce and distribute
video content using the
Chicken Soup for the Soul
brand and related content, for visual exploitation on a worldwide basis.
Financing Activities
Our financing activities provided
net cash in 2017 totaling $16.2 million. This resulted primarily from the net proceeds from our IPO of $24.0 million and proceeds
from the sale of Class A common stock in a private placement of $1.4 million. This total of $25.4 million was offset, in part,
by full repayment of the Credit Facility, net of advances received during the period, of $3.5 million and the full repayment of
the Term Notes, net of proceeds received during the period, of $2.1 million, and by a $3.7 million increase in amounts due from
affiliated companies.
For 2016, our financing activities
provided net cash totaling $7.0 million. This resulted primarily from net advances received under the Credit Facility of $2.8 million
and the proceeds received from the issuance of Term Notes of $2.5 million. In addition, we received proceeds from the sale of Class
A common stock in a private placement of $0.9 million.
Anticipated Cash Requirements
Most producers of television
series incur significant initial expenditures to produce, acquire, distribute and market episodic television programs and online
video content, while revenues from these television programs and online video content may be earned over an extended period of
time after their completion, per the requirements of GAAP.
However, our financing strategy
is to fund operations and our investment in television programs through payments we receive from sponsors. The net proceeds from
our IPO allows us to be more flexible as to payment timing from sponsors and to use cash and cash equivalents on hand to fund production
in advance of such sponsor payments. Nevertheless, we do not begin production until we have payment commitments from sponsors in
excess of our production costs. As a result, we expect our production activity to be cash flow positive for each series. In addition
to the acquisition of Screen Media, we may acquire businesses or assets, including individual video content libraries that are
complementary to our business. Any such transaction could be financed through cash on hand, our cash flow from operations, our
Credit Facility while available, or new equity or debt financing.
Critical Accounting Policies
and Significant Judgments and Estimates
This discussion and analysis
of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles in the United States of America, or U.S. GAAP. The preparation
of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and
expenses during the reported periods. In accordance with U.S. GAAP, we base our estimates on historical experience and on various
other assumptions we believe are reasonable under the circumstances. Actual results may differ from these estimates under different
assumptions or conditions.
Our significant accounting policies
are described in more detail in the notes to our condensed consolidated financial statements appearing elsewhere in this Quarterly
Report on Form 10-Q, and should be read in conjunction with the audited consolidated financial statements and accompanying notes
included in our report on Form 1-A POS for the year ended December 31, 2016. There have been no significant changes in our critical
accounting policies, judgments and estimates, since December 31, 2016.
Recent Accounting Pronouncements
See Item 1 of Part 1, Condensed
Consolidated Financial Statements – Note 3 “
Recent Accounting Pronouncements”.
JOBS Act
We are an emerging growth company
(EGC), as defined in the JOBS Act and are eligible to take advantage of certain exemptions from various reporting requirements
that are applicable to other public companies that are not emerging growth companies, including, but not limited to, only two years
of audited financial statements in addition to any required unaudited interim financial statements with correspondingly reduced
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure, not being
required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations
regarding executive compensation in our periodic reports and proxy or information statements, and not being required to adopt certain
new and revised accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected
to avail ourselves of the extended time for the adoption of new or revised accounting standards, and, therefore, will not be subject
to the same new or revised accounting standards as public companies that are not emerging growth companies.
Off-Balance Sheet Arrangements
As of September 30, 2017 and
December 31, 2016, we had no off-balance sheet arrangements.
Effect of Inflation and Changes
in Prices
We do not expect inflation and
changes in prices will have a material effect on our operations.